ISSN 2076-9202 (Print) VOLUME 7 NUMBER 1 Feb 2015 ISSN 2218-046X (Online)
International Journal of Information,
Business and Management
International Journal of Information, Business and Management, Vol. 7, No.1, 2015 International Journal of Information, Business and Management
ABOUT JOURNAL
The International Journal of Information, Business and Management (IJIBM) was first published in 2009, and is published 4 issues per year. IJIBM is indexed and abstracted in EBSCO, DOAJ, Ulrich's Periodicals Directory, Cabell's Directory, ProQuest(ABI/INFORM Global), IndexCopernicus, JournalSeek, New Jour, getCITED, Directory of Research Journals Indexing, Open J-Gate, Universal Impact Factor, CiteFactor, ResearchBib, EBSCO Open Access Journals, Scientific Indexing Service, InnoSpace - SJIF Scientific Journal Impact Factor, The Index of Information Systems Journals, National Central Library Taiwan, National Library of Australia .Since 2011, the IJIBM is listed and inedxed in the Cabell's Directory in Computer Science and Business Information Systems (www.cabells.com), which is accepted in many universities for credit towards tenure and promotion.Since 2013, the IJIBM has been included into the EBSCO (Business Source Corporate Plus database), one of the largest full-text databases around the world.Since 2013, the IJIBM has been included into the ProQuest(ABI/INFORM Global) list.
IJIBM is an international journal that brings together research papers on all aspects of Information, Business and Management in all areas. The journal focuses on research that stems from academic and industrial need and can guide the activities of managers, consultants, software developers and researchers. It publishes accessible articles on research and industrial applications, new techniques and development trends.
IJIBM serves the academic and professional purposes for those such as scientists, professionals, educators, social workers and managers. It provides new methodology, techniques, models and practical applications in various areas.
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CONTENTS
1 Publisher, Editor in Chief, Managing Editor and Editorial Board
2 The Impact of Political Advertising through Social Networking Sites on Egyptians’ Political Orientations and Choices
Khaled A. Gad
3 Connotation of “Human Capital: Concept, Effects and Benefits (Review)
Dr. Muhammad Tariq Khan, Dr. Asad Afzal Humayun, Dr. Muhammad Sajjad
4 Intellectual Capital & Organizational Advantage: an economic approach to its valuation and measurement
Fragouli Evaggelia
5 Integrating David programming model with Balance Scorecard (BSC) in order to decrease or eliminate the weaknesses of David’s model and performance improvement (case study: Mahan air lines)
Mohammad reza Shojaei, Maryam Mottaghi
6 A Comparative Study of NAV (Net Asset Value) Returns of Open-ended and Close-ended Mutual Funds in Pakistan
Nawaz Ahmad, ImamuddinKhoso, RizwanRaheem Ahmed
7 Information Management in Defense of White-Collar Criminals
Petter Gottschalk
8 Business Intelligence Rationalization: A Business Rules Approach
Rajeev Kaula
9 Effect of Psychological Empowerment, Distributive Justice and Job Autonomy on Organizational Commitment
Faisal Rashid Gohar, Mohsin Bashir, Muhammad Abrar, Faisal Asghar
10 IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF TEXTILE SECTOR OF PAKISTAN
Qazi Muhammad Yasir Ayub
11 L’Oreal’ Baby Girl PerfumeMarketing Strategy
Hemaloshinee Vasudevan
12 Cloud Computing Data Security for Personal Health Record by Using Attribute Based Encryption
Neetha Xavier, V.Chandrasekar
13 THE IMPACT OF RAPID TECHNOLOGICAL DEVELOPMENTS ON INDUSTRY: A CASE STUDY
ii ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015 Dr. EVANGELIA FRAGOULI, PETROS FOUNTOUKIDIS
14 Factors Affecting Impulse Buying and Percentage of Impulse Buying in Total Purchasing
Dr. Muhammad Tariq Khan, Dr. Asad Afzal Humayun, Dr. Muhammad Sajjad
15 Energy Consumption and Economic Growth Nexus: Empirical Evidence from Tunisia
Kais Saidi, Sami Hammami
16 The Role of Training in Small Business Performance
Rami Alasadi, Hicham Al Sabbagh
17 FDI IMPACT ON ECONOMIC GROWTH IN THE FRAMEWORK OF ARDL: EVIDENCE FROM PAKISTAN
SALEEM KHAN, ULFAT JEHAN
18 THE INFLUENCE OF ECOTOURISM DEVELOPMENT OF JATILUWIH VILLAGE IN TABANAN REGENCY OF BALI PROVINCE TO THE DEVELOPMENT OF ECONOMY, SOCIAL CULTURE AND ENVIRONMENT
Anak Agung Putu Agung, Ni Ketut Aryani, Ferry Jie
19 A Study of Inter Sectoral Linkages in India
Dr Mousumi Bhattacharya, Dr Sharad Nath Bhattacharya
20 APPLICATION OF METHODOLOGY FOR BUSINESS PROCESS IMPROVEMENT IN SPECIALIZED DIAGNOSTIC LABORATORY
Elizabeta Mitreva, PhD, Nako Taskov, PhD, Snezana Crnkovic
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Publisher: Elite Hall Publishing House
Editor in Chief: Managing Editor:
Dr. Muzaffar Ahmed (Bangladesh) Dr. Jia Chi Tsou E-mail: [email protected] Associate Professor, Department of Business Administration China University of Technology, Taiwan E-mail: [email protected]
Editorial Board:
Dr. Claudio De Stefano Prof. Paolo Pietro Biancone Dr. Michael A. Hignite, Ph.D. Professor, Department of Computer Science Professor of Financial Accounting, Faculty of Management Professor, Department of Computer Information Systems, University of Cassino, Italy. and Economics College of Business E-mail: [email protected] University of Turin, Italy Missouri State University, USA Email: [email protected] Email: [email protected]
Dr. Jen Ming Chen Dr. Morteza Rasti Barzoki Mr. Mohsen Fathollah Bayati Professor, Institute of Industrial Management Assistant Professor, Department of Industrial Engineering Department of Industrial Engineering National Central University, Taiwan Isfahan University of Technology, Iran Iran University of Science and Technology, Iran E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Dr. Edgardo Palza Vargas Dr. Solomon Markos Mr. Olu Ojo Telfer School of Management Assistant Professor, Department of Management Lecturer, Department of Business Administration University of Ottawa, Canada Arbaminch University, Ethiopia Osun State University, Nigeria Email: [email protected] Email: [email protected] Email: [email protected]
Dr. Mohammed-Aminu Sanda Dr. Khalid Zaman Dr. Kartinah Ayupp Visiting Research Fellow, Lulea University of Technology, Assistant Professor, Department of Management Sciences Deputy Dean, Economics and Business Sweden COMSATS Institute of Information Technology, Pakistan Universiti Malaysia Sarawak, Malaysia Senior Lecturer, Department of Organization and Human Email: [email protected] Email: [email protected] Resource Management, University of Ghana, Ghana Email: [email protected]
Dr. Malyadri. Pacha Dr. Arif Anjum Mr. Andrew McCalister Principal, Government Degree College Assistant Professor, M.S.G. Arts, Science & Commerce Global Research Awardee, Royal Academy of Engineering, Affiliated to Osmania University, India College, Malegaon, India University of Cambridge, UK Email: [email protected] Managing Editor, International Journal of Management Email: [email protected] Studies Email: [email protected] Dr. Mohsin Shaikh Dr. M. Razaullah Khan Mr. Kai Pan Professor & Head, Department of Management Studies Associate Professor, Department of Commerce & Research Assistant & Ph.D. Candidate, Department of SKN College of Engineering, Pune, India Management Science Software and Information Systems Email: [email protected] Maulana Azad College, Aurangabad, India University of North Carolina (UNC Charlotte), USA Email: [email protected] Email: [email protected]
Dr. Sundar Kumararaj Dr. Mohammad Alawin Mr. Dinh Tran Ngoc Huy Associate Professor, Commerce Wing, Directorate of Associate Professor, Business Economics Department Visiting lecturer, PhD candidate , Banking University HCMC, Distance Education, The University of Jordan, Amman, Jordan Vietnam Annamalai University, Annamalai Nagar, Tamil Nadu, India E-mail: [email protected] Email: [email protected] E-Mail: [email protected]
Web: http://ijibm.elitehall.com ISSN 2076-9202 (Print) ISSN 2218-046X (Online)
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The Impact of Political Advertising through Social Networking Sites on
Egyptians’ Political Orientations and Choices
Khaled A. Gad [email protected]
Abstract This paper examines the influence of political advertising through social networking sites on Egyptians’ political orientations and choices. The objective of this paper is to determine how Egyptians’ social networking sites users are interested in political promoting campaigns and how they deal with such campaigns. Also the paper measures the impact of these campaigns in influencing the current political events, the individuals’ political choices and orientations, and the extent to which they can rely on such campaigns.
A structured questionnaire has been developed and posted for two weeks on social networking sites; only 397 questionnaires were valid for statistical analysis. Research findings showed that Egyptians are interested in the political promoting campaigns through social networking sites, Egyptians believe that political promoting campaigns have a significant effect on the political situation, and Egyptians deal positively with the political promoting campaigns. Furthermore the political promoting campaigns through social networking sites have a low effect on Egyptians’ political orientations and choices. Finally, Egyptians believe that political promoting campaigns through social networking sites have low level of credibility. These results can provide insights for Egyptian politicians to use social networking sites as an essential promoting channel to achieve the appropriate change in Egyptians’ political orientations and beliefs .
Keywords: Political Marketing, Political Advertising, Political Promoting Campaigns, Social Networking Sites, Egypt.
1- Introduction The ways social media are changing communication have received a lot of media attention in the past few years. Social media tools are said to give people the ability to connect and unite in a crisis, raise awareness of an issue worldwide, and usurp authoritarian governments. These tools can be used to quickly get information, such as, to locate a nearby hospital in case of emergencies. The increased awareness brought on by social media can help raise a significant amount of money for a cause. For the first time, everyone can be a journalist.
As countries around the world discover the influence of social media, citizens have begun to use its power to improve their lives; one such country, Egypt, has created a new standard for social reform through social media and networking. Egypt possesses a long and rich history, a cohesive kingdom from around
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3200 B.C. Over thousands of years, various nations ruled Egypt; in 1952, it finally gained independence from outside rulers, ousting the British-backed monarchy. Since then Egypt has been a republic, and until the revolution of 2011, was ruled by President Hosni Mubarak who had attempted to reform Egypt’s slow economy by decentralizing it. However, that didn’t work, and Egypt’s citizens remain poor, 20 percent living below poverty level. The country ranks 21st in the world for Internet users, with just over 20 million users in 2009 out of a population of 83 million or roughly one quarter (The World Factbook, 2011). This is surprising if one considers the Internet a vital instrument in the Egyptian revolt. Social media and networking have come to define a new generation of communication and have created a platform that possesses limitless abilities to connect, share, and explore our world. Social media is content created and shared by individuals on the web using available websites which allow members of the site to create and display their photos, thoughts, and videos. Social media allows people to share content with a select group or with everyone. Social media is a way for communicating with one or more people at the same time. These sites allow people to communicate in real-time; thereby effectively developing democracy. This is because, social media sites give people a voice to express their opinions about government, television, political leaders, and any other issues of concern. Sites like Twitter, Facebook, and YouTube allow power to be shifted to people. They create two-way communication between individuals or small groups and the general public.
Social media is not a new idea, however; people have used technology for decades to communicate, mobilize voters for political participation and, “while it has only recently become part of mainstream culture and the business world, people have been using digital media for networking, socializing and information gathering – almost exactly like now – for over 30 years” (Borders, 2009).
Political marketing bears a number of similarities to the marketing of goods and services. Consumers choose among brands just as voters choose among candidates or parties. Consumers display brand preferences (party loyalty and party identification) and are exposed to mass media (campaign advertising) and direct sales (“get-out-the vote” efforts), which may rely on various emotional appeals and social influences. Candidates, like firms, choose product positions (policy positions), determine promotional mix (allocate campaign resources), and conduct market research (polling). These decisions need to account for and anticipate competitors' actions, implying that candidates participate in games of strategic interaction.
However, there are also important differences. First, unlike consumers who can usually purchase their preferred product, the winner-take-all nature of elections ensures that in almost every election, a significant proportion of voters choose a candidate who is not elected. Second, similar to consumer choices, political attitudes and choices are inherently determined in a social context, but the election process (e.g., its winner-take-all nature) provides voters a significant incentive to influence others and thus dramatically magnify social considerations compared to many product and service choices. Third, there is a distinct temporal rhythm to political marketing, with most elections (purchase opportunities)
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occurring every 2 to 4 years, each with a clear endpoint. Fourth, while firms probably prefer to maximize the sum of discounted profits, a political candidate's objective function is murkier (e.g., a candidate might participate in a race with little expectation of winning in order to build a reputation that could serve her in the future toward non-political goals).
Recently, research opportunities in political marketing have attracted a growing number of scholars across the field. The central role of competition naturally attracts those academics skilled in applying analytical and empirical modeling. The importance of communications and persuasion attracts those who seek to bridge behavioral work in consumer choice to political settings.
Political campaigns are some of the most expensive marketing efforts in existence today (The Economist 2010). Yet, research in marketing and political science is inconclusive on a number of fundamental questions about the marketing of political candidates: How does advertising affect voters (Lau et al. 1999)? How should candidates allocate marketing budgets across campaign activities (Bartels 1988; Gerber and Green 2000)? How should candidates choose policy positions (Adams et al. 2005)? These questions fall at the intersection of marketing and political science. Despite early efforts to draw attention to such questions (Rothschild 1978), marketing scholars have largely ignored them; making this area a fertile ground for research.
The goal of this paper is to determine how Egyptians’ social networking sites users are interested in political promoting campaigns and how they deal with such campaigns. Also the paper measures the impact of these campaigns in influencing the current political events, the individuals’ political choices and orientations, and the extent to which they can rely on such campaigns.
2- Literature Review 2.1. Political Marketing Harrop (1990) perceives political marketing not just about political advertising, party political broadcasts and electoral speeches, but about covering the whole area of party positioning in the electoral market. Kavanagh (1995) sees political marketing as electioneering, i.e. as a set of strategies and tools to trace and study public opinion before and during an election campaign in order to develop campaign communications and to assess their impact. A similar view is expressed by Scammell (1995).
Maarek (1995) conceptualizes political marketing as, “a complex process, the outcome of a more global effort implicating all the factors of the politician’s political communication”, and emphasizes that, “political marketing’ is the general method of ‘political communication’, one of its means”. He considers the introduction of marketing in politics as an outcome of “the elaboration of a policy of political communication…a global strategy of design, rationalization and conveyance of modern political communication”. One terminological inconsistency should be noted though. In the aforementioned figure, Maarek appears to equate a company’s consumer products with a political party’s political
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communications. Such a parallel cannot be drawn, as a party’s “product” consists not of its political communications but of; a) its ideological platform and its set of policy proposals, b) the party leader, the candidates and party officials and c) party members in general.
In Maarek’s view, political marketing has become an integral and vital component of political communication. In his words: “Political communication…encompasses the entire marketing process, from preliminary market study to testing and targeting”. It should be noted that Maarek admits that the main areas of application of political marketing are image-making campaigns and election campaigns.
Lock and Harris (1996) point out that “political marketing is concerned with communicating with party members, media and prospective sources of funding as well as the electorate”, while Wring (1997) defines political marketing as “the party or candidate’s use of opinion research and environmental analysis to produce and promote a competitive offering which will help realize organizational aims and satisfy groups of electors in exchange for their votes”.
O’ Cass (1996) argues that the use of marketing “offers political parties the ability to address diverse voter concerns and needs through marketing analyses, planning, implementation and control of political and electoral campaigns”. Taking this one step forward he argues that “the central purpose of political marketing is to enable political parties and voters to make the most appropriate and satisfactory decisions”. O’ Cass (1996) uses an exchange model to define political marketing. According to him, when voters cast their votes, a transaction takes place. In return for their votes, the party/candidate offers better government and policies after election. This way, O’ Cass argues that marketing can be applied to political processes as it is specifically interested in how these transactions are created, stimulated and valued. Lock and Harris (1996), commenting on the exchange model, argue that it has “a great deal to offer as a working definition of political marketing”. They note though that, as it is, the exchange definition of political marketing is broad enough to include “everything that is conventionally regarded as political science”.
Scammell (1999) notes that, due to the rapid expansion and the diversity of this field of science, there is still no consensus on the definition of political marketing. In her view, political marketing shares with history, the desire to explain political leaders’ behavior; with political science, the desire to understand the political processes; and with political communication, an interest in the art of persuasion.
2.2. Political Advertising Political advertising includes all means and technologies required and necessary to attract public opinion, and therefore the votes of the voters, as well as providing appropriate causes that are chosen according to several personal and objective criteria, thus creating an appealing and ideal image for a political candidate's, while showing and highlighting the negative aspects of the competing candidates in front of
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public opinion and the electorate (Alsamydai, M. 2000). The axis of the political advertising must be established according to the following: 1. A political ideology that should be displayed first. 2. A communicative methodology, which must remain simple and represent a solution for the problems felt by the public.
In an earlier work on political advertising in Western democratic systems, the editors defined televised political advertising as “moving image programming that is designed to promote the interests of a given party or individual” (Kaid and Holtz-Bacha, 1995).Thus the definition incorporates “any programming format under the control of the party or candidate and for which time is given or purchased”. As media systems, channels, and formats of communication have expanded and evolved, the central elements of this definition have remained useful, but a more modernized and professionalized definition now suggests that political advertising should be viewed as “any controlled message communicated through any channel designed to promote the political interests of individuals, parties, groups, governments, or other organizations.” This broader conceptualization not only implies the controlled and promotional aspect of the message but acknowledges the different formats, channels, and sponsors that may characterize such communications in a given environment.
As political advertising developed in various media environments and as social changes led to a weakening influence of once-powerful social characteristics and subsequent political predispositions, election campaigns became more important. Traditional social structures have lost their meaning for the individual and no longer prescribe individual behavior in a binding way. Therefore, social variables that played a central role in the classical models of electoral behavior no longer predict voting decisions with the same probability that they once did. Instead, political behavior has become unstable and fluctuating (Holtz-Bacha, 2002). In fact, findings from several Western democracies have shown that party ties are weakening. Voter volatility, as expressed in increasing numbers of floating voters, and voting abstention has been attributed to the so-called dealignment process (Dalton, 2002). This is a process that seems to be going on in many countries but not at simultaneously or with the same speed everywhere. With voters being more unpredictable and their electoral decisions open to short-term influences, election campaigns have gained new importance. It is therefore not surprising that political leaders would be interested in the use of political communications, such as political advertising that provide for the controlled and unmediated conditions that best serve their campaign interests.
2.3. Political Propaganda and Persuasion Taithe and Thorton (2000) see propaganda as part of a historical tradition of pleading and convincing and therefore, as a form of political language. However, propaganda is always articulated around a system of truths, and expresses logic of exclusive representation. Since the purpose of propaganda is to convince, to win over and to convert; it has therefore to be convincing, viable and truthful within its own remit. The shaping of the term propaganda is also an indication of the way the political nation judges the manner in
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which political messages are communicated. Propaganda may shape the communities, as well as defining them.
Qualter (1962) emphasized the necessity of audience adaptation: “Propaganda, to be effective, must be seen, remembered, understood, and acted upon . . . adapted to particular needs of the situation and the audience to which it is aimed”. Influencing attitudes, anticipating audience reaction, adapting to the situation and audience, and being seen, remembered, understood, and acted on are important elements of the communicative process. Pratkanis and Turner (1996) defined the function of propaganda as “attempts to move a recipient to a predetermined point of view by using simple images and slogans that truncate thought by playing on prejudices and emotions”. They separated propaganda from persuasion according to the type of deliberation used to design messages. Persuasion, they said, is based on “debate, discussion, and careful consideration of options”, to discover “better solutions for complex problems,” whereas “propaganda results in the manipulation of the mob by the elite”. Coombs and Nimmo (1993) regarded propaganda as “an indispensable form of communication” and “a major form of public discourse;” however, they presented propaganda as “the mastery of all modern forms of palaver”—that is, “the use of guile and charm”. Their approach is similar to Ellul’s, for they state, “The volume and sophistication of the new propaganda is so vast, and growing, that we increasingly take it for granted as natural and, thereby, we find it exceedingly difficult to distinguish what is propaganda from what is not”. Although their major interest is political propaganda, they also focus on advertising, marketing, and sales pitches. These definitions vary from the general to the specific, sometimes including value judgments, sometimes folding propaganda into persuasion, but nearly always recognizing propaganda as a form of communication.
Politics, at its core, is about persuasion. Various theories and explanations of persuasion have been suggested throughout the centuries. The roots of the study of persuasion can be traced in Ancient Greece. Greek philosophers were mainly concerned with the issues of ethical means of persuasion. Since Aristotle defined his principles of persuasion in his Rhetoric, there have been attempts at defining the principles of successful persuasion but for most of human history, persuasion has been studied as an art.
In the early 1900s, research on (political) persuasion was carried out mostly as propaganda analysis and public opinion research. Studies of propaganda in the early part of the twentieth century can be regarded as the antecedents to the social scientific study of persuasion. “After World War II, researchers stopped referring to their subject of study as propaganda and started investigating various constructs of persuasion” (Jowett and O’Donnell, 1992).
The research on persuasion has focused on the characteristics of the source of communication i.e. the communicator, and tried to figure out the influence of these characteristics on the communicator’s
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persuasive endeavors. The communicator’s credibility, expertise, likeability and similarity to the audience are some of the characteristics that have been tested by the researchers.
Perceived credibility consists of the judgments made by a message recipient concerning the believability of a communicator (O’Keefe, 2002). Hovland and Weiss (1951) had hoped to show that high credibility or (good “ethos”) increased persuasion; they claimed that the credibility of a source would affect the incentives for changing one’s attitude. They contrasted the credibility effect of the American physicist Robert Oppenheimer with that of the Soviet newspaper Pravda by giving the same message (one with reference to Oppenheimer, the other with reference to Pravda) about the nuclear submarines; “U.S. subjects were more persuaded by the [same] message from Oppenheimer in those Cold War days”(Deaux et al., 1999). This is attributed to the fact that for the U.S. subjects Oppenheimer represented high credibility with expertise, whereas Pravda was perceived as a source with low credibility with no expertise.
As O’Keefe underlines both expertise and trustworthiness emerging as basic dimensions of credibility because only when these two aspects exist together can we have reliable communication. “A communicator who knows what is correct (has expertise) but who nevertheless misleads the audience (is untrustworthy, has a reporting bias) produces messages that are unreliable guides to belief and action, just as does the sincere (trustworthy) but uninformed (low-expertise, knowledge-biased) communicator (O’Keefe, 2002).
Other studies on source characteristics have demonstrated that physically attractive sources were more effective than less attractive ones. For example, Chaiken’s study of messages about university dining hall menus found that attractive persuaders had a greater persuasive effect than did unattractive persuaders (Chaiken, 1979). Experiments have also shown that people are more easily persuaded if they share some similarities with the source (Goethals & Nelson, 1973).
2.4. Social Media “Social Media” are “a group of Internet ‐based applications that build on the ideological and technological foundations of Web 2.0, which allows the creation and exchange of user ‐generated content” (Kaplan and Haenlein, 2010). As of June 2010, 22% of time spent online (or one in every four and a half minutes) is spent using social media and blog sites worldwide (“Social Networks/Blogs Now Account for One in Every Four and a Half Minutes Online,” 2010). The global average time spent per person on social media sites is now nearly five and a half hours per month (Grove, J. 2010). Popular social media include Facebook, Twitter, LinkedIn, YouTube, Flickr, and Tumblr.
Information Communication Technology (ICTs) is defined by Manuel Castells as “the converging set of technologies in microelectronics, computing (machines and software), telecommunications/broadcasting, and optoelectronics.” For the purpose of this discussion, social media networks (SMNs), a subset of ICTs,
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will be defined as “online tools and utilities that allow communication of information online and participation and collaboration” (Newson et al., 2008). Additionally, social media tools are websites that “interact with the users, while giving them information.”
To understand how social media can be used for social change, it is important to understand the ways that one can communicate online. This section will discuss the ways that users can communicate and interact with groups of people. A group can be a formally organized number of people or simply people who identify with similar values or who have a common interest or experience. For example, Flickr users who tag their photos with the same event tag could be considered a group. Users can: 1. Virtually join a group. 2. Get updates and messages about a group. 3. Read, post, or comment on news and information. 4. Receive / send private messages with group leaders and members. 5. Read and engage in transparent conversations that can be seen by others “Lurk” in a group—read information without making oneself known as a follower or member of the group. 6. Interact with others despite social or location boundaries.
Online communication is different from the one ‐way communication of television, radio, and newspapers because online users can respond to messages in real time, not just receive them. However, much like learning of a news story from television, receivers of that information are not necessarily prone for action. Even those who virtually “join” a group may take no further action. “Instead of attending meetings, workshops and rallies, un ‐committed individuals can join a Facebook group or follow a Twitter feed at home, which gives them some measure of anonymity but does not necessarily motivate them to physically hit the streets and provide fuel for a revolution” (Papic and Noonan, 2011).
An important aspect of motivating social change is convincing people that their participation will make a difference, especially if their participation will require them to experience personal discomfort or danger. This is no small task.
In large groups, such as those involved in a collective political protest, the contribution to the action of each ordinary member (i.e., one who is not a leader of the group) has no discernible impact on the group’s overall success; therefore, the rational individual will not absorb the cost of participation(such as time, financial resources, or the threat of physical injury), since he or she will enjoy the public good in any case if others provide it (Finkel et al., 1989).
2.4.1. Social Media in Egypt and the Arab world Social media allowed Egyptians living under dictatorship to communicate with the world. Egyptians used
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Facebook, Twitter, and YouTube to send millions of internet links, news, articles, videos, and free campaigns to people all over the world. The internet allowed people living in a state that controlled traditional media to complain about conditions. News quickly spread because Twitter allowed Egyptians to upload information in as it happened and write comments about their government. This helped to gain national attention because Egyptians wanted change for their country. Social media allowed the free speech that wasn’t allowed by the government.
The significance of social media tools cannot be appreciated without being placed within the context of media culture in the Arab world. Over the last ten years, the Arab region has experienced the highest rates of technology adoption amongst all developing nations (Howard, 2011). According to Bernard Lewis, “Perhaps the single most important development is the adoption of modern communications. The printing press and the newspaper, the telegraph, the radio, and the television have all transformed the Middle East” (Lewis, 2011). Though Internet penetration has increased dramatically over the last several years, with 40-45 million Internet users identified in 16 Arab countries surveyed in 2009; the technological capabilities of modern life that are taken for granted in highly developed societies have progressed in a relatively short span of time and have not been embraced by the authoritarian governments that dominate the Middle East (Abbassi, 2010). “Print and visual media developed within decades of each other in the Arab world, as opposed to developing through centuries in Western Europe,” so it is of little surprise that “ruling elites fear the Internet as a conduit for political and moral subversion, and this fear has dominated the discourse on the use of the technology” (Hammond,2007). Before 1990, media ownership fell mostly in the hands of the government, subject to strict censorship and supervision. This was largely a result of the 1952 revolution which “claimed a monopoly on truth and hence had to have a monopoly over the means of propagating it as well” (Ayalon, 1995). The 1996 launching of Al-Jazeera, the scion of independent media broadcasting in the Middle East represents a pivotal moment in the history of Arab media, a “revolution in Arabic-language television” and establishing itself as “a forum for debate on human rights, fundamentalism, religion and corruption, offending just about every Arab state in the process.” As Internet access has proliferated across the Arab region, a “highly ambivalent and complex relationship between media and governments” has developed, in which Arab autocracies have encouraged Internet penetration in the name of economic development, while simultaneously attempting to maintain control over the spread of information and media sources (Khamis and Vaughn, 2011). This complex relationship between increasing Internet accessibility and a complementary increase in suppression of online freedom has led to a culture of subversion, an “emerging cyber world that knows no physical boundaries,” based on online social networking (Salmon, C.T. et al. 2010). With a lack of truly independent and representative media, disenfranchised youths have searched for an alternative method of participation in the public and political spheres.
2.4.2. Social media and politics The Internet has undoubtedly destabilized many of the features of the analog world that we once took for granted. The ease with which we can now communicate across vast distances to audiences that were
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formerly inaccessible to any one of us has fundamentally changed how our culture operates. The effective decentralization of the communications architecture that was once uniformly controlled by a few large corporations has made the role of the mass media in our lives vastly different than it was just a few years ago.
One area in which these changes are keenly felt is in the realm of politics. Although modern elections are still fought primarily on the airwaves, many potential voters are spending less time in front of their televisions and more time taking in news content online. With increasing consumer use of online platforms, the strategies employed by politicians seeking office have been forced to change with them as well. Modern election campaigns must now wage war on two fronts; one traditional (television), and the other very new (online). The interplay between these spheres, however, is poorly understood.
Vitak, J. et al., (2011) indicate that SNSs social network sites continue to grow in popularity as sites for users to share information about their thoughts and activities, and that Facebook has had the biggest growth in recent years with more than 400 million active users. The site's affordances suggest it might be well suited for increasing political participation, in part through the ability to acquire greater political knowledge, increase political interest, and improve political self-efficacy, all of which have been linked to greater political participation in prior research. For example, users can join political groups, download candidate applications, and share their political opinions through the many communication tools on the site. Users can view their friends’ activities by scrolling through the News Feed on their home page, and they can comment on friends' posts, thus engaging in active conversation about political issues. From a resource perspective, these affordances also offer affordable (i.e., free) opportunities to develop civic engagement skills with little to no additional time costs for users of Facebook, while simultaneously having access to a potentially large enough ''public'' to develop civic skills.
3- Developed Hypotheses The following hypotheses have been developed for this paper: H1: There is an interest in the political promoting campaigns on social networking sites. H2: The political promoting campaigns on social networking sites affect the political situation. H3: The users deal positively with the political promoting campaigns on social networking sites. H4: The political promoting campaigns on social networking sites are highly credible. H5: The political promoting campaigns on social networking sites affect individuals’ political orientations. H6: The political promoting campaigns on social networking sites affect individuals’ political choices.
4-Research Methodology The present study is confined to Egyptians’ social networking sites users. The structured questionnaire has been developed, and to improve its structure and content the questionnaire was shown to academicians in marketing departments in different universities in Egypt and to experts in politics.
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Suggestions and inputs were given and considered and with that, the questionnaire had been posted on social networking sites i.e. Facebook, Twitter and Instagram for a period of two weeks. A total of 397 completed questionnaires were valid for statistical analysis. The questionnaire is divided into two sections. Section A is designed to obtain demographic information about users, and the questions focused on age, gender, educational level, etc. Section B has 14 statements relating to six main dimensions namely, users interest on political promoting campaigns, effect on the political situation, how they deal with political promoting campaigns, political promoting campaigns credibility, effect on political orientations and, effect on political choices.
4.1. Measurement The questionnaire included perceptual measures that were rated on a five-point Likert scale. Each scale item was anchored at the numeral 1; 1 = “strongly disagree”; 5 = “strongly agree”. Several statistical techniques were used including frequency analysis, descriptive analysis, Cronbach’s alpha, and t-test. The t-test was used to accept/reject the hypotheses through testing the average mean of single sample, based on the value of scale midpoint, the higher value the more favorable the attitude, and the vice versa. A midpoint equal to 3 was chosen by adding the lower coded value of the Likert scale (1) and the upper coded value (5) of the Likert scale and dividing it by 2.
4.2. Demographic Profile of the Respondents As shown in table 1, the total sample for the quantitative study is 397 respondents after the editing and validation process. It can be depicted from table 1 that the majority of the respondents are males (78.1%) as compared to females (21.9%) see table 1 and graph 1. This indicates that males are more interested in political promoting campaigns through social media networking sites compared to females. With regards to age, around 80% of the respondents belong to a young age group. This suggests that younger individuals are more interested in political promoting campaigns through social networking sites compared to older individuals. As shown in table 1, 76.1% of the respondents who are interested in political promoting campaigns through social media networking sites are bachelor degree holders or below compared with those holding masters or doctoral degree.
Table 1 Socio-economic Profile of Respondents
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Frequency Percent Gender Male 310 78.1 Female 87 21.9 Age Below 20 years 127 32.0 Between 20 and 30 190 47.9 years Between 30 and 40 55 13.9 years Over 40 years 25 6.3 Educational Qualifications Below bachelor degree 113 28.5 Bachelor degree 189 47.6 Masters degree 63 15.9 Doctoral degree 32 8.1
5-Results 5.1. Reliability and Validity of the Measures Table 2 shows that, obtained Cronbach’s alpha value for all items in this study is 0.88.This shows a high degree of reliability, as a reliability coefficient of Cronbacj’s Alpha 70% or higher is considered acceptable in most social science research situations.
Table 2Reliability Coefficient Number of cases Cronbach’s Alpha Number of items 397 0.88 14
5.2. Hypotheses Testing Table 3 shows that users are interested in the political promoting campaigns on social networking sites. The analysis illustrates that the overall mean score of respondents, which measures the users interest in political promoting campaigns on social networking sites is (3.87), which is above the scale midpoint with standard deviation that shows a small dispersion around this mean. This result was further validated by one sample t-test, which revealed that the overall mean difference for the individuals interest in the political promoting campaigns on social networking sites was statistically significant (sig. 0.000) with high t-value (t= 25.26). As a result, hypothesis H1 is accepted, which is; there is an interest in the political promoting campaigns on social networking sites.
Table 3: One sample statistic and t-value of attitude statement regarding interest in political promoting campaigns Dimension 1: Interest in political promoting campaigns Test value=3
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Statements Mean score Std dev. t-value Sig 1- Political promoting campaigns through social networking sites are 3.9219 .86541 21.226 0.000 important to me.
2- I am interested in the political promotional messages that posted on 3.8186 .95998 16.991 0.000 social networking sites. Interest in political promoting campaigns 3.8703 .68639 25.263 0.000
Table 4 shows that political promoting campaigns on social networking sites affect the political situation. The analysis illustrates that the overall mean score of respondents, which measures the effect of political promoting campaigns on social networking sites in the political situation is (3.80), which is above the scale midpoint with standard deviation that shows a small dispersion around this mean. This result was further validated by one sample t-test, which revealed that the overall mean difference for the effect on political situation was statistically significant (sig. 0.000) with high t-value (t= 26.57). As a result, hypothesis H2 is accepted, which is; the political promoting campaigns on social networking sites affect the political situation.
Table 4: One sample statistic and t-value of attitude statement regarding the effect on political situation Dimension 2: effect on political situation Test value=3 Statements Mean score Std dev. t-value Sig 3- I believe that the political promotional campaigns have an impact in 3.8489 .90862 18.615 0.000 society.
4- I believe that the various political promotion campaigns have an 3.9496 .85427 22.149 0.000 effect in the current political events.
5- I believe that the political promotional campaigns changed the 3.6146 1.03235 11.862 0.000 political reality. Effect on the political situation 3.8044 .60308 26.575 0.000
Table 5 shows that users deal positively with the political promoting campaigns on social networking sites. The analysis illustrates that the overall mean score of respondents, which measures how users deal with the political promoting campaigns on social networking sites is (3.74), which is above the scale midpoint with standard deviation that shows a small dispersion around this mean. This result was further validated by one sample t-test, which revealed that the overall mean difference for how individuals deal political promoting campaigns on social networking sites was statistically significant (sig. 0.000) with high t-value (t= 26.45). As a result, hypothesis H3 is accepted, which is; the users deal positively with the political promoting campaigns on social networking sites.
Table 5: One sample statistic and t-value of attitude statement regarding dealing with political promoting campaigns Dimension 3: dealing with political promoting campaigns Test
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value=3 Statements Mean score Std dev. t-value Sig 6- I receive promoting campaigns from political parties on social 3.7053 .86240 16.295 0.000 networking sites.
7- I receive promoting campaigns from political candidates for elections 3.6071 .99329 12.177 0.000 via social networking sites.
8- I forward the political promotion campaigns to friends via social 3.8489 .95205 17.765 0.000 networking sites.
9- I discuss the content of the political promotion campaigns with others 3.8086 .88399 18.225 0.000 through social networking sites. Dealing with political promotion campaigns 3.7424 .55925 26.452 0.000
Table 6 shows that the political promoting campaigns on social networking sites have low credibility. The analysis illustrates that the overall mean score of respondents, which measures the credibility of political promoting campaigns on social networking sites is (2.60), which is below the scale midpoint. This result was further validated by one sample t-test, which revealed that the overall mean difference for the credibility of the political promoting campaigns on social networking sites was statistically significant (sig. 0.000) with low t-value (t= -7.36). As a result, hypothesis H4 is rejected, which is; the political promoting campaigns on social networking sites are highly credible.
Table 6: One sample statistic and t-value of attitude statement regarding the credibility of the political promoting campaigns Dimension 4: credibility of the political promoting campaigns Test value=3 Statement Mean score Std dev. t-value Sig 10- I believe that the political promotion campaigns on social networking 2.6020 1.07675 -7.365 0.000 sites are credible. Credibility of the political promoting campaigns 2.6020 1.07675 -7.365 0.000
Table 7 shows that the political promoting campaigns on social networking sites have low effect on individuals’ political orientation. The analysis illustrates that the overall mean score of respondents, which measures the effect of political promoting campaigns on social networking sites on individuals’ political orientation is (2.70), which is below the scale midpoint. This result was further validated by one sample t-test, which revealed that the overall mean difference for the effect of the political promoting campaigns on social networking sites on individuals’ political orientation was statistically significant (sig. 0.000) with low t-value (t= -4.07). As a result, hypothesis H5 is rejected, which is; the political promoting campaigns on social networking sites affect individuals’ political orientation.
Table 7: One sample statistic and t-value of attitude statement regarding the effect on political orientation Dimension 5:the effect on political orientation Test
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value=3 Statement Mean score Std dev. t-value Sig 11- I believe that the political promotion campaigns on social networking 2.7003 .99154 -4.071 0.000 sites led to change my political orientations. Effect on political orientation 2.7003 .99154 -4.071 0.000
Table 8 shows that the political promoting campaigns on social networking sites have low effect on individuals’ political choices of political organizations and political candidates for election. The analysis illustrates that the overall mean score of respondents, which measures the effect of political promoting campaigns on social networking sites on individuals’ political choices is (2.60), which is below the scale midpoint. This result was further validated by one sample t-test, which revealed that the overall mean difference for the effect of political promoting campaigns on social networking sites on individuals’ political choices was statistically significant (sig. 0.000) with low t-value (t= -4.25). As a result, hypothesis H6 is rejected, which is; the political promoting campaigns on social networking sites affect individuals’ political choices.
Table 8: One sample statistic and t-value of attitude statement regarding the effect on political choices Dimension 6: effect on political choices Test value=3 Statements Mean score Std dev. t-value Sig 12- I believe that the political promotion campaigns on social networking sites influence my choice of the political parties. 2.6977 .89855 -0.472 0.000 13- I believe that the political promotion campaigns on social networking sites influence my choice of the political individuals. 2.6650 1.00308 -3.209 0.000 14- I believe that the political promotion campaigns on social networking sites influence my choice of the political candidates for elections. 2.6171 .97934 -2.556 0.000 Effect on political choices 2.6599 .54222 -4.251 0.000 6- Discussion and Conclusion
The new revolution in social media has exploded into an effective communication tool, not only for social connections, but also for political reforms and social actions. Perhaps social media was not absolutely critical to the political change in Egypt; however, it helped to develop a way for political change, which would have been impossible without it. Looking at the impact of social media on Egypt, it has been observed that people ask for a Facebook profile rather than a telephone number; chat online rather than talk on the phone; emailing has even started to decline in comparison to the increase in use of social media and blogs, and around the world, social media has opened new possibilities for communication and social change.
The objective of this study is to determine how Egyptian users of social networking sites are interested in political promoting campaigns and how they deal with such campaigns. Moreover, this paper measures the impact of campaigns on influencing, current political events, the individual’s political choices and orientations, as well as, the extent to which individuals can rely on such campaigns. 15 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
This study contains six dimensions. Each dimension has its own corresponding hypothesis; three hypotheses were accepted and three were rejected. Research findings indicate that Egyptians are basically interested in political promoting campaigns on social networking sites. Additionally, Egyptians confirm the great impact of such campaigns on the community at large through affecting political reality and political events. This study also reveals that political promoting campaigns posted on social networking sites are positively received and dealt with by Egyptians. This finding can be used by politicians such as, (organizations, individuals, and candidate for elections) in effectively achieving their political goals. On the other hand, Egyptians believe that these campaigns have low level of credibility and reliability. Hence, this study concludes that political promoting campaigns on social networking sites have a low impact on the individual’s political orientations and choices such as, (political organizations, political individuals, and candidate for elections).
To sum up, politicians should depend more on social networking sites in disseminating their political promoting campaigns; they should also develop the style and content of the promoting message in a way which enhances its ability to affect and achieve the appropriate change in individual’s orientations and belief. Also, they ought to adopt the reliability concept as an essential feature in their posted campaigns and fulfill their given promises, as, reliability is the base of confidence building and is essential in achieving the required change in individual’s orientations for the benefit of those politicians.
Finally, in order to create the right impact, a political party needs to make its presence felt on at least one of the social networking sites, such as, Facebook, Twitter, YouTube, Flickr….etc. because they are the fastest growing and furthest reaching of social networking sites and they present striking ways of publicizing to and connecting with individuals.
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Connotation of “Human Capital: Concept, Effects and Benefits (Review)
Dr. Muhammad Tariq Khan Head, Department of Psychology University of Haripur, Pakistan [email protected] Dr. Asad Afzal Humayun Head, Department of Management Sciences, COMSATAS, Vehari Campus And Dr. Muhammad Sajjad Head, Department of Management Sciences, COMSATAS, Attock, Campus
Abstract Recently accumulation of human capital has gained a central role. Human capitals refer to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets of employees, leading to satisfaction and performance of the employees, and eventually increasing firm performance. This paper is focused on discussing the concept, mode of building, effects and benefits of human capital.
Introduction According to Bassanini & Scarpetta (2002)in the recent growth literature the accumulation of human capital has gained a central role. Marimuthu et al (2009) expressed that ‘Human Capital’ with increasing globalization and the saturation of the job market is getting wider attention especially due to the recent downturn in the various world economies. All the countries emphasize on a more human capital development by devoting necessary efforts and time to accelerate the economic growth. Thus to enter the international arena one of the fundamental solutions is human capital development. Firms must develop human capital by investing necessary resources, which tend to have a great impact on performance and, firm performance is viewed in terms of financial and non-financial performance. Marimuthu et al (2009) revealed that human capitals refer to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets of employees, leading to satisfaction and performance of the employees, and eventually increasing firm performance. Marimuthu et al (2009) also narrated that most firms in response to the changes, have embracedthe notion of human capital that has a good competitive advantage and will enhance higher performance. Human capital development becomes a part of an overall effort to achieve cost-effective and firm performance. Hence, firms need to understand human capital that would improve performance, enhancing satisfaction of employee. Although there is a broad assumption that human capital has positive effects on performance of the firms, the notion of performance for human capital remains largely untested.
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Origin of Concept of Human Capital
Germon et al (2011) mentioned that the human capital concept was developed first by Theodore Schultz (Schultz, 1961) and Garry Becker made this theory famous.
Malloch (2003) also revealed this fact in detail expresseing that the term “human capital” first appeared in a 1961 in an American Economic Review article, “Investment in Human Capital”, by Nobel-Prize winning economist, Theodore W. Shultz. Most economists are agreed that human capital comprises skills, experience, and knowledge some add personality, appearance, reputation, and credentials to the mix and still some others, equate human capital with its owners, suggesting human capital consists of “skilled and educated people”. Newer conceptions of ‘ total human capital’ view the value as an investment. A researcher Thomas O. Davenport, in Human Capital: ‘What It Is & Why People Invest It (1999) looked at how a worker performs depending on ability and behavior. For him, the choice of tasks also requires a time allocation definition. The combination of ability, behavior, effort, and time investment produces performance, the result of personal investment. Thomas O. Davenport gave the equation for this as: THC = A & B x E x T, where a multiplicative relationship enhances the outcome. In this equation THC (stands for Total Human Capital ) = A for ability, B for behavior, E for effort and T for (time),
Olaniyan & Okemakinde (2008) concluded referring many studies that the economic prosperity and functioning of a nation depend on its physical and human capital stock. Whereas the former has traditionally been the focus of economic research, factors affecting the enhancement of human skills and talent are increasingly figuring in the research of social and behavioral sciences.
Definitions Human Capital (HC) Marimuthu et al (2009) and Rizvi (2011) both quoted Schultz (1993), who defined the term “human capital” as: “A key element in improving a firm assets and employees in order to increase productivity as well as to sustain competitive advantage”.
Marimuthu et al (2009) and Rizvi (2011) asserted that to sustain competitiveness human capital in the organization becomes an instrument used to increase productivity. Human capitals refer to processes relating to education, training, and other professional initiatives for increasing the levels of knowledge, skills, abilities, values, and social assets of employees, leading to satisfaction and performance of the employees, and eventually increasing firm performance. Human capital is an important input for organizations especially for continuous improvement of employees mainly on knowledge, skills, and abilities. Marimuthu et al (2009) and Rizvi (2011) also quoted definition of human capital by OECD (Organization for Economic Co-Operation and Development, 2001) who defined it as: “human capital is
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referred to as: “The knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being”.
Human Capital Development
Rizvi (2011) mentioned with references that Adam Smith defined four types of fixed capital characterized as that affording a revenue or profit without circulating or changing masters. The four types were: (1) useful machines, instruments of the trade; (2) buildings as the means of procuring revenue; (3) improvements of land and (4) human capital. ‘Human capital represents the knowledge, skills and abilities that make it possible for people to do their jobs. “Human Capital Development is about recruiting, supporting and investing in people through education, training, coaching, mentoring, internships, organizational development and human resource management”.
Human Capital Theory
Olaniyan & Okemakinde (2008) stated that in general terms, human capital represents the investment people make in themselves that enhance their economic productivity. They defined human capital theory as:
“Human Capital Theory is the theoretical framework most responsible for the wholesome adoption of education and development policies”
What is Human Capital – concept Jeong (2002) is of the opinion that conceptually, human capital input is the labor input in the production adjusted for quality in terms of skills and health.
Marimuthu et al (2009) asserted with citations that human capital theory is rooted from the field of macroeconomic development theory. Capitals have different kinds including: schooling, computer training course, and medical care expenditures, and in fact, lectures on the virtues of punctuality and honesty are also capital, because, they improve health, raise earnings, and add to a person’s appreciation of literature over a lifetime. Consequently, it is fully in keeping with the capital investment in capital, which are, investment with valuable returns that can be calculated. From the perspective of Classical Economic Theory, human capital considers labor as a commodity, tradable in terms of sale and purchase. This classical theory very much focused on the exploitation of labor by capital. However, contrary to traditional of labor, human capital refers to the knowledge, expertise, and skill one accumulates through
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education and training. With emphasis on economic and social importance of human capital theory, the most valuable of all capital is that investment in human being. Researchers distinguish general-purpose human capital from firm-specific human capitals. Firm-specific human capital includes expertise obtained through education and training in accounting procedures, management information systems, or other expertise specific to a particular firm. General-purpose human capital is knowledge gained through education and training in areas of value to a variety of firms such as generic skills in human resource development. Education and training are the most important investment in human capital. Marimuthu et al (2009) Ballot et al (2001) commented that R&D capital and marketing capital are the most frequently cited items, but workers’ human capital is also important. The firm is able to augment this capital by hiring educated workers and by training its existing workers and conversely, it can reduce it by its separation policy, its attitude towards layoffs, quits, and retirement. It is also responsible for the organization of the individual workers’ human capital and any resulting efficiency. Human capital exercises its effects on the firm’s productivity through following mechanisms: (1)an efficiently organized firm with a manager who has substantial human capital will make better decisions than its rivals with lower human capital; (2)innovation will be stimulated by the quality and training of the personnel in the R&D department; (3)learning-by-doing is also higher if workers have high human capital. Germon et al (2011) with references mentioned that Human capital is the aggregation of individual’s incorporated intangibles assets, e.g. knowledge, experience, skills etc. Human capital is a set protean and highly volatile as likely to disappear with the departure of those who hold this capital. Based on these features can bring out a typology of human capital. Thus human capital is decomposed in three categories, such as: General human capital includes all the generic knowledge and competences an individual that has accumulated during his school career and professional experiences.
Human capital specific to the firm this capital is the set of skills and knowledge that an individual must master to operate effectively in the firm that employs him. This capital and Organizational capital are interdependent.
Human capital specific to the task develops through work experience, vocational training. It corresponds to the skills, knowledge that an individual will acquire about and for his job.
Rizvi (2011) revealed that human capital is a stock of skills and knowledge enabling to perform labor so as to produce economic value. It is workers gained skills and knowledge through education and experience with different areas in that field.
Stiles & Kulvisaechana (n.d) ‘The concept and perspective of human capital is on the assumption of the fact that there is no substitute for knowledge and learning, creativity and innovation, competencies and capabilities; and that they need to be relentlessly pursued and focused on environmental context and
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competitive logic of the firm’.
Alani, & Isola (2009) in their study on Nigeria stated that human capital refers to human beings who possess skills, knowledge and attitudes, which, are utilized in the production process. Human capital is generally believed to be the most important factor of production, because it coordinates other factors of production to produce goods and services for human consumption. Human capital is the most active catalyst of economic growth and development.
Stiles & Kulvisaechana (n.d) are of the view that it is generally understood that ‘human capital consist of the capabilities, knowledge, skills and experience of the individual employees and managers, of the company as they are relevant to the task at hand, and also the capacity to add to this reservoir of knowledge, skills, and experience through individual learning’. It becomes clear that human capital is rather broader in scope than human resources. The emphasis on knowledge is important, and in an individual level perspective, human resource is chiefly concerning with job-related knowledge, whereas the human capital has moved beyond the individual to embrace the idea that knowledge can also be shared among groups and institutionalized within organizational processes and routines.
The Relationship between Human Capital and Firm Performance
Arrau (1989) expressed that human capital in the economic literature has played a dual role. On the one hand, being, fundamental source of aggregate growth and on the other hand being used to explain the observed profile of earnings, work-time and training over the life cycle.
Marimuthu et al (2009) described with citations that the focus of human capital is on two main components, i.e. individuals and organizations and with references further elaborated this concept that human capitals have following four key attributes: (1) Flexibility and adaptability (2) Enhancement of individual competencies (3) The development of organizational competencies and (4) Individual employability. These attributes generate and add values to individual and organizational outcomes. Findings of various studies incorporate human capital with higher organizational commitment; and enhanced organizational retention; higher performance and sustainable competitive advantage. Fundamentally all this debates focuses on individual and organizational performance. Human capital importance depends on its degree to contribute to the creation of a competitive advantage. From economic viewpoint transaction-costs indicate that firms gain a competitive advantage when they own their specific resources to which rivals cannot copy. Thus, with the increase of human capital uniqueness, firms have incentives to invest resources into their management with the aim to reduce risks and capitalize on productive potentials. Individuals need to enhance their competency skills in order to be competitive in their organizations. The
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human capital theory, within its development, paid greater attention to training related aspects, which is much related to the individual perspective. Therefore, training is an important component of human capital investment. Any activity, improving the worker’s quality of productivity is human capital investment. This refers to the knowledge and training persons require and undergo that increases their capabilities in performing activities of economic values. The importance of training is emphasized, which is linked to the longevity of companies with greater tendency to business and economic growth whereas the lack of training of workforce leads to low competitiveness. In turn, a greater stock of human capital is associated with greater productivity and higher salaries and as a source human capital besides motivating workers, and boosting up their commitment also creates expenditure in R&D and pave a way to generate of new knowledge for the economy and society in general. For small businesses human capital is a valuable asset, and positively associated with business performance.
Stiles & Kulvisaechana (n.d) argued that the link between performance and human capital is based on two theoretical strands. The first is the resource-based view of the firm. The second is the expectancy theory of motivation (Vroom 1968) composed of three elements: the valence or value attached to rewards; the instrumentality, or the belief that the employee will receive the reward upon reaching a certain level of performance; and the expectancy, the belief that the employee can actually achieve the performance level required. HRM practices that encourage high skills and abilities - e.g. careful selection and high investment in training - can be specified to make the link between performance and human capital management.
Modes of Building Human Capital Acquah & Hushak (1978) asserted that in a production activity the inputs’ quality is recognized as a very important determinant of their productivity. Changes in labor quality are used to account for changes in labor productivity growth. If quality of labor is a constraint to economic development, policy makers are to make decisions about how human capital formation could be increased to improve development potential.
But what is the answer of how human capital formation could be increased? The answer is Training and Education.
1-Training and Education
Rizvi (2011) expressed with citations that the rapid development of the human development theory has led to greater attention being paid to training related aspects. Human capital investment is any activity, leading to the improvement in the quality (productivity) of the worker. Thus, training is an important component of human capital investment. It refers to the knowledge and training persons require and undergo for increasing their capabilities for performing activities, having economic values. Contemporary studies have shown the importance of training. The lack of training of workforce is related
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to low competitiveness. A greater human capital stock is related with greater productivity and higher salaries. Similarly, training is linked to the longevity of companies, which in turn is related to business and economic growth. Human capital is a motivating source to workers, boosting up their commitment and creating expenditure in research and development (R&D) and eventually paving way to generate new knowledge for the economy and society in general. Human capital is a precious asset for small businesses, and positively related with business performance. Investments in training are very desirable, from both a personal as well as a social perspective. From the organizational perspective, human capital plays a very significant role in the strategic planning of how to create competitive advantage. It is stated that a firm’s human capital has two dimensions, which are value and uniqueness. A firm demonstrates value of its resources when they allow for improvements in effectiveness, capitalization of opportunities and neutralization of threats.
Marimuthu et al (2009) further asserted that investment in training is desirable form both a personal and social perspective. From the organizational level, human capital plays an important role in the strategic planning on how to create competitive advantages. A firm’s human capital has two dimensions, which are value and uniqueness. Firm indicates that resources are valuable when they allow improving effectiveness, capitalizing on opportunities and neutralizing threats. In the context of effective management, value focuses on increasing profits in comparison with the associated costs. Firm’s human capital can add value if it contributes to lower costs, provide increased performances.
Olaniyan & Okemakinde (2008) commented that the belief that education is an engine of growth rests on the quality and quantity of education in any country. Empirical evidences of human capital model revealed that investment in education has positive correlation with development and economic growth.
McDonald & Roberts (2002) concluded that education capital alone is a potentially inadequate proxy for human capital as a factor in the determination of growth, while the importance of country- and time-specific fixed effects challenge the assumptions of common initial states of technology and constant rates of technical progress.
Olaniyan & Okemakinde (2008) also expressed that education is an economic good because it is not easily obtainable and thus needs to be apportioned. Economists regard education as both consumer and capital good because it offers utility to a consumer and also serves as an input into the production of other goods and services. As a capital good, education can be used to develop the human resources necessary for economic and social transformation. The focus on education as a capital good relates to the concept of human capital, which emphasizes that the development of skills is an important factor in production activities. It is widely accepted that education creates improved citizens and helps to upgrade the general standard of living in a society. Therefore, positive social change is likely to be associated with the production of qualitative citizenry. This is an increasing faith that education is an agent of change in many developing countries. The pressure for higher education in many developing countries has
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undoubtedly been helped by public perception of financial reward from pursuing such education. Generally, this goes with the belief that expanding education promotes economic growth.
Olaniyan & Okemakinde (2008) expressed that human capital theory rests on the assumption that formal education is highly instrumental and even necessary to improve the production capacity of a population. In short, the human capital theorists argue that an educated population is a productive population. Human capital theory emphasizes how education increases the productivity and efficiency of workers by increasing the level of cognitive stock of economically productive human capability, which is a product of innate abilities and investment in human beings. The provision of formal education is seen as a productive investment in human capital, which the proponents of the theory have considered as equally or even more equally worthwhile than that of physical capital. The rationality behind investment in human capital is based on three arguments: (i) - That the new generation must be given the appropriate parts of the knowledge which has already been accumulated by previous generations; (ii) - That new generation should be taught how existing knowledge should be used to develop new products, to introduce new processes and production methods and social services; and (iii) - That people must be encouraged to develop entirely new ideas, products, processes and methods through creative approaches. Human capital theory provides a basic justification for large public expenditure on education both in developing and developed nations. The theory was consistent with the ideologies of democracy and liberal progression found in most Western societies. Its appeal was based upon the presumed economic return of investment in education both at the macro and micro levels. Efforts to promote investment in human capital were seen to result in rapid economic growth for society. For individuals, such investment was seen to provide returns in the form of individual economic success and achievement. Alani, & Isola (2009) expressed that human capital means human beings who have acquired skills, knowledge and attitudes, which are needed to achieve national development. These human resources are either employed in work organizations or are self-employed. They help to realize organizations’ objectives with the overall intention of promoting national growth and development. The skills, knowledge and attitudes gained through human capital formation are a direct result of deliberate investments in human beings. Human capital has become important in the development process because human beings are the most-prized assets of a nation. Other factors of production such as land, unskilled labor, financial and physical capital need skilled human resources to create wealth. Those countries of the world that have realized sustainable development have invested heavily in human beings. A nation with abundant natural resources cannot achieve its full potentials without skilled human resources. Technical innovations that have occurred in the developed countries and a few developing countries are a product of human capital development. When the creative potentials of people are developed, their ability to participate in the development process is enhanced. In spite of the fact that human capital development also focuses on self-development so that individuals can realize their potentials and meet their aspirations,
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the key objective of human capital formation is the transformation of the social, political, economic and technological life of the society. The desire is to increase the capacity of people to do productive work and serve as agents of national growth and development. Viewed from another perspective, human capital development focuses on all activities directed toward producing people with appropriate skills, knowledge, attitudes, motivation and job-related experience which are required for national development. Human development also occurs when national development goals are realized, since human beings are expected to be the objects of development. The significance of human resources in the development process has therefore compelled its development..
Alani, & Isola (2009) mentioned that Scultz (1961) observed that investments in formal education, health facilities and services, on-the-job training, adult education and migration improve the capabilities of human beings and are therefore avenues for promoting human capital development. Formal education is perhaps the most important avenue for improving the abilities of human beings. It is the form of education given in primary, secondary and tertiary educational institutions. These institutions offer full-time educational programs to their beneficiaries. However, most tertiary institutions of learning organize part-time, evening or sandwich programs for adults who cannot secure admission into full-time programs or combine study with work. One of the major tasks of Education in economic growth and development is the production of skilled human resources for the various sectors of the economy. Apart from performing this quantitative function, formal educational institutions also impart appropriate skills, knowledge and attitudes in their clients. These skills, knowledge and attitudes assist them in coping with the demands of their jobs. This is called the qualitative function of education. It is upon these skills and knowledge gained through formal education that employers of labor build on through on-the-job training. Education also increases the mobility of labor and promotes technological development through science and technology education. Education also raises the productivity of workers through the acquisition of skills and knowledge. Provision of health facilities and services to people in a society is also a way of developing human capital. Health care services increase life expectancy, thus ensuring that workers can contribute to national development for a long time until they reach the retirement age and ensure that the resources invested in them are not wasted as a result of premature death. Health services also improve the strength and vigor of people and guarantee that they remain healthy for productive work. On-the-job training programs organized by employers of labor also remain a vital way of developing human capital. No matter the level of skills, knowledge and attitudes inculcated in people through formal education, on-the-job training will still fill some gaps in human capital development. Situations always arise for employers to conduct on-the-job training for workers, within or outside the premises of the organization. On-the-job training may become necessary when employees are promoted, when they assume new responsibilities, when the organization notices that there is declining productivity, when there is the need for specialization among workers or when they need additional skills and knowledge to cope with the demands of the job.
Asteriou, & Agiomirgianakis (2001) asserted that educational variables generally act as proxy for
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investment in human capital. It is widely accepted that the principal institutional mechanism for developing human skills and knowledge is the formal educational system. Most developing countries are now believing, that the rapid expansion of educational opportunities is the key to their economic and national development.
2- Investment in Human Capital
Acquah & Hushak (1978) argued that the distribution of personal income is related to investment in human capital.
Wolff (2000) wrote that human capital theory views schooling as an investment in skills and hence as a way of augmenting worker productivity.This line of reasoning leads to growth accounting models in which productivity or output growth is derived as a function of the change in educational attainment. The early studies on this subject showed very powerful effects of educational change on economic growth. Coetzer (2006) with numerous references argued that the idea of investing in human beings as a form of capital since the emergence of human capital theory has accelerated the growing interest in theory and practice of workplace learning. Literature on workplace learning, organizational learning and the learning organization is evidence of this growing interest in making workplaces into effective learning environments. Why learning has become so important? Learning is important due to need of organizations for responding to rapid and continuous change in the external environment of organization. Organizations for their survival must monitor their external environments, and anticipate, and adapt to continual change. In the organizations, implementation of change initiatives e.g. the introduction of new technology, products or processes, need the acquisition of new knowledge and skills. Faster learning organizations can adapt quicker and thus avoid the economic evolutionary ‘weeding out’ process. Learning is important, for survival of organization, and also because the ability to learn faster than competitors is the only sustainable competitive advantage. Having entered the knowledge based era there is increasing emphasis on human capital, rather than physical and financial assets because in the economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge. Thus knowledge is regarded as a key asset of employees, and their ability to acquire and use it is considered a source of competitive advantage. For employees learning at and through work is increasingly important for ensuring their employability, because of insecurity in employment, and the proliferation of flexible contracts of employment. Organizations expect employees to be flexible, adaptable and constantly learning to perform new and changing tasks. Although organizations do not provide employment security, the ability of employees and their willingness to learn and adapt are the key determinants of their employability elsewhere. Thus, employability is the ‘new security’. As a part of the ‘new deal’ in employment, good employers will ensure that their employees remain employable by keeping them up to date through learning and development. Arguments for the importance of learning are not limited to economic considerations. Another line of reasoning emphasizes learning at work as part of general education for citizenship and fuller participation in society as a whole. Employees develop skills
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of expression and communication that spill over into their personal lives. They learn new ways of collaborating and planning that they apply in the families and community organizations to which they belong. They not only become more effective in their present responsibilities, but help transform the nature of work in which they are engaged creating new work practices and forms of production. These arguments for the importance of learning suggest that learning in organizational settings should be continuous, if both the economic and social goals of enhanced participation in learning are to be realized. The growing awareness of the need to encourage continuous learning has far reaching consequences for managers, who are expected to manage the workplace as a place fit for learning. The literatures that focus on workplace learning, organizational learning and the learning organization encourage managers to move away from a directing role and towards that of coach and facilitator, and thus, take on increasing responsibility for supporting the learning of their staff. There is no place for managers who do not appreciate their own vital role in fostering learning.
Rizvi (2011) concluded that undoubtedly, human resource input plays a significant role in enhancing competitiveness of the firms. At a glance, substantial studies were carried out on human capital and their implications on firm performance were widely covered and obviously, human capital enhancement will result in greater competitiveness and performance.
Malloch (2003) cited Davenport who elaborated a worker investment notion, describing what it means to work in the relationship nexus between the employee and the employer. He explained mostly in anecdotal, company specific detail, how companies that treat workers as investors can attract, develop and retain people. These people both get much value from their organization—and give so much in return that they create a competitive advantage for their firms. A further quantitative refinement in this field is the so-called business case for ROI in human resources. Works such as The HR Scorecard among others puts forward a measurement case for viewing the employee as a human asset.It has become almost trite to recite the fact that in both economic development and in firm behavior—the most important assets are the human ones.
3- Human Resource (HR) Practices Rodwell & Teo (2003) asserted referring literature that specific HR practices could be used to enhance the human capital of employees. Indeed, such practices are indicators of a firm’s investment in HR. With the increasing focus on the management of knowledge, as a source of competitive advantage, the human capital approach provides the opportunity for emphasizing the intellectual aspects of capital. Researchers have also concluded HR practices are related to a firm’s performance in the manufacturing industry. To increase productivity through human capital, the firm needs to harness the potential contribution of the employees. This human capital must then be developed and managed as a core competency of the firm, and a potential source of competitive advantage. A key mechanism for harnessing the human capital is by using appropriate HR practices. Indeed, the importance of HR practices in international business operations and the significance of understanding the differences in employment
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relations cannot be underestimated. HR practices can also be used to match the firm’s HR characteristics with the specific stage of internationalization. Exporting is generally used as a vehicle for manufacturing firms to accumulate knowledge of, and experience in, international business. Organizations can put in place the internal systems to encourage and enhance the accumulation of knowledge. Empirical evidence has demonstrated that human capital-enhancing HR practices are important as a mechanism for enhancing the accumulation of knowledge. HR practices enhancing human capital have been found positively correlated with the adoption of advanced manufacturing technologies. For instance, the adoption of HR practices, which focused on selective staffing, was shown to contribute towards the development and maintenance of employees who were able to adapt to the demands and pressures of internationalization. The use of HR to develop and harness knowledge is consistent with the human capital theoretical approach, which argues the skills, knowledge, and abilities possessed by the HR would provide economic value to organizations. Proponents of human capital theories argue that when complemented by the adoption of HR practices, there is a positive relationship between firm investment in human capital and performance. Effects and Benefits of Human Capital Germon et al (2011) concluded that human capital is a component of intangible assets of the company. The recent global economic crisis gave rise to the central role of human capital in the sustainable performance of organizations. To remain competitive significance firms must constantly innovate, produce better and be responsive.
Miller & Upadhyay (2000) reported that human capital generally contributes positively to total factor productivity. In poor countries, however, human capital interacts with openness to achieve a positive effect.
Ballot et al (2001) commented with references that human capital has a direct effect on value added as an input, either through a higher direct productivity of educated workers or because of better decisions, organization of work or supervision. Trained workers can also informally train their colleagues in a team. In the same way, technological capital as measured by the value of patents, the cumulated R&D expenditures, etc.can enter the production function since it is a source of innovation and consequently of value added. This modeling strategy means that the growth of value added can be obtained only by the growth of either human or technological capital. It requires positive net flows of investment. At the aggregate level, the neoclassical endogenous growth model of Lucas 1988relies on this necessity of an accumulation of human capital. Besides the static effects, there are dynamic effects of intangible capital that might lead to increasing returns. Researchers are a source of continuous innovation and growth and education increase the capacity to innovate and to adapt to new technologies, which means higher diffusion of new technology throughout the economy. This continuous improvement in technology generates productivity growth. A certain level of intangible capital then favors productivity growth.
Bassanini & Scarpetta (2002)asserted thatthe accumulation of human capital has gained a central
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role in the recent growth literature. While there is strong theoretical support for a key role of human capital in the growth process, empirical evidence is not clear-cut. On the one hand, micro-economic studies based on human capital earnings functions suggesting significant returns to education. On the other hand, growth regressions have generally failed to find a significant contribution of human capital to economic growth. In particular, the evolution of human capital over time is not found statistically related to output growth.
Simon&Nardinelli (2002) describing the contribution of human capital in cities growth and development opined that cities that start out with proportionately more knowledgeable people grow faster in the long run because (a) knowledge spillovers are geographically limited to the city and (b) knowledge is most productive in the city wherein it is acquired. It is found that city-aggregates and metropolitan areas with higher average levels of human capital grew faster over the 20th century. The effects of human capital were large: a standard deviation increase in human capital in 1900 was associated with a 38% increase in average annual employment growth of city-aggregates over the period 1900–86. The average annual employment growth over the period 1940–90 was of about 15%. Although the rise of the automobile appears to have overwhelmed the importance of human capital in cities dominated by manufacturing early on, human capital seems to have been economically more important in manufacturing cities than in non-manufacturing cities later on. Moreover, the estimated effects of human capital persisted for very long periods of time, suggesting either that adjusting to the steady state is very lengthy, or that shocks to growth are correlated with the presence of human capital.
Germon et al (2011) elaborating importance of human capital in the daily life of the SMEs expressed that there are 19 million SMEs in hugely different sectors in the EU, which are the backbone of economy of the European Union and employ nearly 75 million people. They are at the heart of the economy and induce an important source of knowledge and skills since centuries. SMEs have very interesting assets such as flexibility, responsiveness, speed of action, to meet the challenges of the economic globalization. These assets must be used to implement a comprehensive strategy to protect the intangible capital. Among the facets of intangible capital human capital have an important place in the daily life of the SMEs. This capital, which includes knowledge, know-how, skills, etc., represents a source of riches for SMEs. Germon et al (2011) quoted Stiglitz (2009) besides others who wrote that Human capital (HC) is a key differentiator for the increase of indicators such as production, quality, and market share. Forgetting the human capital as a factor in the economic performance of a business is a mistake. HC refers to the set of physical skills, like intellectual, an employee contest to economic production.
Human Capital and Economic Growth Asteriou, & Agiomirgianakis (2001) asserted that on the endogenous growth side of models, human capital accumulation has been recognized as one of the most important engines of economic growth. They mentioned Romer (1990) who developed a growth model, assuming that the creation of new ideas/designs is a direct function of the human capital (which has the form of scientific knowledge).
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Therefore, investment in human capital, by improving research and development, entails a growth in physical capital investment, which in turn results in higher real growth rates. Persistent accumulation of knowledge by human beings, either with intentional efforts, or with learning by doing promotes the productivity of labor and capital, and is the driving force of economic growth.
Hoti (2003) expressed that the role of human capital for economic growth is widely recognized in economics literature. Labor force quality has a consistent, stable, and strong relationship with economic growth. The macro effects of human capital, has been analyzed by regressing the economic growth on human capital as well as on other variables. Growth and schooling are highly correlated across countries. Hoti (2003) mentioned results of a study that greater schooling enrolment in 1960 consistent with one more year of attainment is associated with 0.30 percent faster annual growth over 1960-1990. Moreover, human capital accumulation seen from an individual viewpoint explains to a great extent earning differentials among individuals in the labor market. Consequently, the level of human capital is important from both macro and micro aspect. Given these facts, governments throughout the world pay increasing attention to the quality of education delivered by schools. While the progress toward the market economy in the early phases of transition did depend on the willingness and commitment of government to implement reforms, the long run adjustment of the transition economies depends primarily on the ability of human capital to absorb and to exercise the knowledge that is necessary to compete internationally. Human capital, that is able to adjust to technological changes and to the principles of market economy is a prerequisite to bring economic prosperity for the nation as a whole. Moreover, the education system [i.e. human capital] is also vital to wider process of societal change that both under-pins economic reforms and which is needed in its own right, because transition involves the developments of new nations.
Measurement of Human Capital Jeong (2002) asserted that broadly, there are two approaches to measuring human capital. One, the cost-based approach measures the cost of human capital investment. For an international comparison of the human capital, the most common measure of the cost is the years of schooling.. In comparing human capital input across countries, it is assumed that the years of schooling embodied in living (and working) people are proportional to the human capital input supplied by these people. The popularity of the measurement method based on the years of schooling seems to stem from the fact that it directly relies on educational investment, which is considered a key element for human capital formation. However, this method has some shortcomings. First, it does not measure the human capital acquired outside the school: skills acquired before schooling, in job training outside the school and in the workplace. A worker with no schooling clearly has a human capital to the extent that he is contributing to the production. Skills acquired in the workplace, especially, may differ greatly between the workers in low-income countries and workers in high-income countries. Second, this method does not measure human capital in terms of health, which is an important factor in labor productivity. Human capital in terms of health may differ greatly between low-income and high-income countries. Third, the measurement using the years of schooling implicitly assumes that the formation of human capital per year of schooling is the same in all
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countries. The quality of education may vary greatly across countries, especially between the low-income and the high-income countries, leading to different quantities of human capital formation per year of schooling. Fourth, the measurement using the years of schooling implicitly assumes that the formation of human capital per year of schooling is the same at all levels of schooling. One can conjecture that the marginal formation of human capital decreases as the duration of schooling increases and is the same as the marginal cost at the point when schooling stops. This conjecture is supported, by the finding, that, the return to primary education is higher than the return to secondary education, which, is higher than the return to tertiary education. The other approach, the income-based one uses the labor income differences across workers with various levels of human capital to measure human capital inputs. Income differences across workers are the differences in the market values of their human capital inputs and are largely determined by the differences in their human capital inputs. The differences in the human capital input could then be derived from the income differences by eliminating the part of the differences due to the factors other than human capital input. Researchers classifies workers by education level, age and sector where they work (urban or rural) in a sample of 21 countries, with the assumption that two workers of the same type, across countries as well as within a country, supply the same human capital input.
Stiles & Kulvisaechana (n.d) concluded that from the foregoing discussion, there is compelling evidence for a linkage between strong people management and performance. But how is human capital to be measured? Measurement is obviously important to gauge the impact of human capital interventions and address areas for improvement, but in this field, measurement is a problematic issue. The process identified by some academics is to specify the key human capital dimensions and assess their characteristics. It is then essential to measure these practices in terms of outcomes. These outcomes differ along a number of, by now, familiar categories: either (i) financial measures; (ii) measures of output or goods and services - units produced, customers served, number of errors, customer satisfaction) or (iii) measures of time - lateness, absence etc. The measurement of human capital remains an area where little commonality can be found. Perhaps this reflects the sheer number of contingencies facing organizations and the idiosyncrasies inherent in specific firm contexts. There is agreement, however, on the point that just relying on financial measures of performance is likely to result in a highly partial evaluation. A stakeholder view or balanced scorecard approach is seen as most appropriate to capture the complexity of human capital activity.
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Intellectual Capital & Organizational Advantage:
an economic approach to its valuation and measurement
Evangelia Fragouli (University of Dundee, UK)
Abstract The information age is a revolution and the modern economy has been utterly transformed in recent years. The notions of production have had to be totally revised. Each company possesses intellectual capital (IC) which must be well managed and exploited in order to succeed. Knowledge circulates at every level of a business (human, structural, customers). An economy based on knowledge gives to a new type of business, new workers and new professions. This paper aims to demonstrate that IC is of a great value to organizations and firms and there is a need this value to be measured. Although there has been effort to this direction from an economic, mainly, perspective, as well as, from a managerial one, however, the context of IC value can not easily be determined in financial terms mainly due to peculiar nature of intangibility of IC elements, finally resulting in measurement problems. The present work is a literature review study of economic approaches to measurement of valuation of intellectual capital in an effort to demonstrate that financial and economic analysis provide some information about IC value but can not capture the whole picture of it. It also highlights on issues of IC context, on its competitive role, and generally on its contribution to organizations. It is recommended that more work has to be done to the direction of measurement placing more emphasis on issues and approaches that have not, or, to a limited extent, have been considered from economists.
Key words: Intellectual Capital (IC), value, asset, intangible, knowledge
1. Intellectual Capital: the new wealth of organizations The popular use of the terms intellectual capital (IC), knowledge capital, knowledge organization, knowledge era, information technology, intangible assets, intangible management, hidden value and human capital hint at the increased importance knowledge assets have in organizations. These terms and others are part of a new lexicon describing new forms of economic value. They are descriptors belonging to a paradigm where sustainable competitive advantage is tied to individual workers’ and organizational knowledge (Bontis, 2001). In today’s complex and turbulent business environment companies are required to be flexible, highly innovative and able to develop proactive strategic approaches. To reach these aims many organizations have realized that knowledge (underlying capabilities) represents the most important factor in creating economic value that underpins a firm’s value creation performance (Marr, Schiuma and Neely, 2002 as cited in Sudarsanan, Sorwar and Marr, 2003). Bontis (1998), Wang and Chang (2005), Kamath (2007) and other have proved the positive relationship between IC management and business output. IC is considered as a strategic performance measure introducing a transition in thinking about a new structure and process supporting a company’s productive assets (Bontis, 2001).
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After the Industrial Age societies have entered the Information Age where wealth has become a product of knowledge. This knowledge has in turn become the most important production factor, assisting change and innovation, and yet it generally does not feature in a company’s profit and loss account. This kind of change leads to transformations at every level in career paths, business hierarchies, strategies, managerial systems (Stewart, 1997). 1.1 Intellectual Capital: Organizational learning & change Stewart (1997) defines intellectual capital (IC) as the intellectual material that has been formalized, captured, and leveraged to create wealth by producing a higher-valued asset. Following the work of Bontis (1996; 1999; 1998; 2001), Seetharamanet. al.,(2004), Flostrand, (2006), Kamath, (2007), Roos, Roos, Dragonetti and Edvinsson (1998), Stewart (1991; 1994; 1997), Sveiby (1997), Edvinsson and Malone (1997), Saint-Onge (1996), Sullivan and Edvinsson (1996) as well as Edvinsson and Sullivan (1996) among others, IC is defined as encompassing: 1. human capital; 2. structural capital; and 3.relational capital. These sub-phenomena encompass the intelligence found in human beings, organizational routines and network relationships respectively. This field typically looks at organizational knowledge as a static asset in an organization - a so-called stock. This concerns many theorists who are also interested in the flow of knowledge. Furthermore, intellectual capital research does not cater to changes in cognition or behavior of individuals which is necessary for learning and improvement. The field of organizational learning has an extensive history in dealing with these limitations. Change is the only constant variable in business today (Senge,1990). Kanter (1989) notes that organizations attempt to develop structures and systems that are more responsive to change. The field of organizational learning has thrived in this context because managers believe that the more they learn about change and learning itself, the better they will be in handling it and the better their firms will perform (Miller, 1996). For the most part, researchers generally agree that individual learning is a necessary precursor to learning at a higher level Greeno, 1980). Some theorists support group level learning as an alternative to the limitations of individual learning. Group knowledge is not a mere gathering of individual knowledge. The knowledge of individual members needs to be shared and legitimized through integrating interactions and information technology before it becomes group knowledge (Tsuchiva, 1994). Once organizational teams integrate their own respective learning, learning at the organizational level starts. This level of the IGO (individual-group-organizational) framework highlights the importance of the learning that resides in the organization's systems, structures, procedures, routines, and so forth (Fiol and Lyles, 1985). This level of organizational learning requires the conversion of individual and group learning into a systematic base of organizational intellectual capital (Shrivastava, 1986 as cited in Bontis, 1999). All business leaders should be appreciative of the power IC can have on business performance. The study of IC stocks and their exponential growth due to organizational learning flows produces a tremendous amount of energy, energy that can take companies far beyond their current vision (Bontis, 1999).
2. Intellectual capital: Definitions and classification Marr and Schiuma (2001, as cited in Sudarsanan, Sorwar and Marr, 2003, p.1) define intellectual capital
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(IC) as “the group of knowledge assets that are attributed to an organization and most significantly contribute to an improved competitive position of this organization by adding value to defined stakeholders”. There is some confusion over how IC differs from intangibles, intangible assets or intellectual property. Another term to describe the same assets is knowledge assets. In this paper we use the terms intangibles, IC, intellectual assets and knowledge assets interchangeably. Intellectual property (IP) is a subset of IC. IP comprises assets such as patents, copyrights and trademarks and its property rights are established under the law and ownership of IP may be transferred. Often there may be a secondary market in IP. In contrast, other intangibles such as goodwill, R & D, organizational capital etc may be too embedded within organizations to be tradeable separately. Their ownership may, however, be transferred as part of the organization in which they are embedded. IC is a broad concept that is often split into different categories – most commonly human, relational and structured capital. Knowledge assets are seen as a resource that underpins capabilities, which in turn can be transformed into core competencies. Subsequently, these core competencies allow organizations to execute (and identify) their strategy in order to achieve better business performance. The attempt to operationalize the concept of knowledge has led academics as well as practitioners to define new concepts to identify, classify and manage knowledge resources of organizations. In order to define knowledge assets one needs taxonomies which facilitate an understanding and help evaluating such organizational components (Edvisson and Malone, 1997; Stewart, 1997; Williams and Bukowitz, 2001 as cited in Sudarsanan, Sorwar and Marr, 2003). A popular taxonomy used is based on earlier classifications provided by a research stream on IC and intangible assets (Stewart, 1997; Roos et al . 1997; Lev, 2001; Stewart, 2001; Sveiby, 1997; Brooking, 1996). However, taking a ‘ knowledge based’ view of the firm these taxonomies where brought together to build a comprehensive framework: the knowledge asset map (Marr and Schiuma, 2001; Schiuma and Marr, 2001; Marr et al . 2002, as cited in Sudarsanan, Sorwar and Marr, 2003). Most classifications of knowledge assets (and IC) proposed in the management literature are particularly useful for accounting and external reporting purposes. However, they do not necessarily provide managers with meaningful tools to manage the company’s knowledge from an internal perspective. The knowledge assets map developed by Marr and Schiuma (2001, as cited in Sudarsanan, Sorwar and Marr, 2003) provides managers with a broader framework to evaluate the organizational knowledge from both an external and internal point of view. It is based on a broader interpretation of IC addressing the assessment of all knowledge assets in a company. The knowledge assets map facilitates the identification and definition of the critical knowledge areas of a company. It is based on an interpretation of a company’s knowledge assets as the sum of two organizational resources: stakeholder resources and structural resources. This distinction reflects the two main components of an enterprise, (1) its actors, who can be internal or external to the organization, and (2) its constituent parts, i.e. the elements at the basis of the organization’s processes. Stakeholder resources are divided into stakeholder relationships and human resources. The former identifies all external actors of a company while the latter represents internal actors. Structural resources are split into physical and virtual infrastructure, which refers to their tangible and intangible nature respectively. Finally, virtual infrastructure is further sub-divided into culture, routines &
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practices, and intellectual property. The six categories of knowledge assets identified by the knowledge assets map are defined in further detail below. Stakeholder relationships include all forms of relationships of the company with its stakeholders. These relationships could be licensing agreements, partnering agreements, financial relations, contracts and arrangements about distribution channels, as well as informal relationships. The stakeholder relationships also include customer loyalty, company names and brand image, which represents a fundamental link between a company and its stakeholders. Human Resource contains knowledge provided by employees in forms of competence, commitment, motivation and loyalty as well as in form of advice or tips. Some of the key components are know-how, technical expertise, and problem solving capability, creativity, education, attitude, and entrepreneurial spirit. Physical infrastructure comprises all infrastructure assets, such as structural layout and information and communication technology like computers, servers and physical networks. Culture embraces corporate culture and management philosophies. Some important components are the organization’s values, the networking practices of employees as well as the set of mission goals. Culture is of fundamental importance for organizational effectiveness and efficiency since it provides the organization’s members with a framework in which to interpret events. The culture provides organizations with a framework that encourages individuals to operate both as an autonomous entity and as a team in order to achieve the company’s objectives. Practices & Routines include internal practices, virtual networks and routines, i.e. tacit rules and procedures. Some key components are process manuals providing codified procedures and rules, tacit rules of behavior as well as management style. Practices and routines determine how processes are being handled and how workflow processes flow through the organization.
3. Intellectual capital and competitive strategies According to a ‘resource-based view’ of competition, IC is considered as an important source of competitive advantage. In their article introducing the dynamic capability approach Teece et al. (1997, as cited in Sudarsanan, Sorwar and Marr, 2003) distinguish (a) models of strategy as emphasizing the exploitation of market power, such as competitive forces (Porter, 1980 as cited in Sudarsanan, Sorwar and Marr, 2003) and strategic conflict (Sharpiro, 1989 as cited in Sudarsanan, Sorwar and Marr, 2003), and (b) models of strategy emphasizing efficiency, such as the resource based perspective (Penrose, 1959; Wernerfelt, 1984, as cited in Sudarsanan, Sorwar and Marr, 2003) and the dynamic capabilities approach. For the research presented in this article we take a strategy view of emphasizing efficiency consistent with the Schumpeterian view of the world. This view of innovation-based competition, increasing returns and development of strategic competence was first framed by Edit Penrose (1959, as cited in Sudarsanan, Sorwar and Marr, 2003) and then later picked up by Birger Wernerfelt (1984, as cited in Sudarsanan, Sorwar and Marr, 2003) and Richard P. Rumelt (1984, as cited in Sudarsanan, Sorwar and Marr, 2003) who are seen as developers of the modern resource based view of the firm (Foss, 1997, as cited in Sudarsanan, Sorwar and Marr, 2003). The resource based view understands firms as heterogeneous
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entities characterized by their unique resource bases (Nelson and Winter, 1982, as cited in Sudarsanan, Sorwar and Marr, 2003) with different distinctive competencies (Selznick, 1957, as cited in Sudarsanan, Sorwar and Marr, 2003). This means that strategist had to move away from a black-box view of the firm and match external opportunities with company’s capabilities (Andrews, 1971, as cited in Sudarsanan, Sorwar and Marr, 2003). Furthermore, transaction cost theories show that organizations should concentrate on core capabilities and not necessarily use excess capabilities to enter a multi-product or diversification strategy (Teece, 1980; Montgomery and Wernerfelt, 1988, as cited in Sudarsanan, Sorwar and Marr, 2003). This means that firms need to strategically develop their resources in order to gain a competitive advantage and therefore increase their performance (Petergraf, 1993, as cited in Sudarsanan, Sorwar and Marr, 2003). Firms need to identify and develop the competencies and capabilities which drive their performance (Prahalad and Hamel, 1990; Teece et al . 1997, as cited in Sudarsanan, Sorwar and Marr, 2003). All organizational capabilities are based on knowledge (Marr and Schiuma, 2001; Winter, 1987, as cited in Sudarsanan, Sorwar and Marr, 2003). Hence, knowledge is a resource that forms the foundation of a company’s capabilities. The ownership of specific knowledge provides organization with specific capabilities (Leonard-Barton, 1992; Prahalad and Hamel, 1990, as cited in Sudarsanan, Sorwar and Marr, 2003). This means that the ownership of knowledge enables specific capabilities and therefore only the management of this knowledge allows an organization to identify, maintain and refresh its competencies over the time. The basis of the knowledge-based view of the firm is therefore the fact that competition is based on capabilities and competencies (Stalk et al . 1992, as cited in Sudarsanan, Sorwar and Marr, 2003) which are underpinned by knowledge (Grant, 1997; Grant, 1996a; Grant, 1996b; Spender and Grant, 1996; Spender, 1996b; Skyrme,1996, as cited in Sudarsanan, Sorwar and Marr, 2003). The performance capacity of a company is hence based on the knowledge of its people (Savage, 1990, as cited in Sudarsanan, Sorwar and Marr, 2003) as well as on the collective or organizational knowledge (von Krogh et al . 1994, as cited in Sudarsanan, Sorwar and Marr, 2003). This explains why companies are thriving to become learning organizations pursuing the objective of continuous development of their knowledge assets (Senge, 1990 as cited in Sudarsanan, Sorwar, and Marr , 2003)).
4. Intellectual assets, growth opportunities and value of a firm A firm’s value is made up of contributions from the various components of its asset portfolio. Physical assets and monetary assets generate income, profits and cash flows by enabling it to produce, market and sell its goods and services. These are sold to identifiable customers in existing markets. On the other hand certain types of assets do not have immediate and measurable payoffs. Investments in these assets are aimed to enable the firm to produce goods or services some time in the future but the outcomes are subject to much uncertainty. Thus these investments are intended to secure and exploit future growth opportunities (Sudarsanan, Sorwar and Marr, 2003). Thus: Firm value = value of assets in place + value of future growth opportunities from assets already in place + value of future growth opportunities from new assets
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An example of the second component is a patent that resulted from R & D investments already made. An example of the third component is a product that may be discovered or developed from future investments that may be made. Both the second and third components are largely path-dependent and derive from the firm’s accumulation of resources and capabilities from past investments although occasionally, a firm may chance upon these growth opportunities. Future growth opportunities allow a firm to create new knowledge leading to new products and services and new markets hitherto unknown. In the words of Hamel and Prahalad (1990, as cited in Sudarsanan, Sorwar and Marr, 2003), while assets in place and the growth opportunities they create enable a firm to compete for the world as it exists, future investment in assets that can generate growth opportunities enable a firm to compete for the future. Research and development leading to innovations must be valued for their potential contribution to the generation of valuable growth opportunities. Investments in activities to generate future growth opportunities may lead to subsequent investments in intangibles as well as tangible assets necessary to exploit the growth opportunities. Thus research investment is the first stage of a sequence of investments. The first stage investment is somewhat speculative with no guarantee that it will successfully result in exploitable growth opportunities e.g. a new design, drug or process. In making the first stage investment a firm is merely buying an option. Valuation of the first stage investment cannot be completed without valuing the payoffs from the subsequent stage investments. In valuing the initial investment as an options we also have to allow for the possibility that in certain unfavorable states of nature i.e. when it is not worthwhile to continue to maintain the option it may be abandoned (Sudarsanan, Sorwar, and Marr , 2003).
5. Intellectual Capital: (value) measurement problem Why organizations seek to measure IC? Five many reasons have been identified (Marr, Gray and Neely , 2003), implying that, IC value should be linked to these: (1) help organizations formulate their strategy; (2) assess strategy execution; (3) assist in diversification and expansion decisions; (4) use these as a basis for compensation; and finally (5) communicate measures to external stakeholders .
Although IC represents an element of business that has existed for years, as a concept was introduced in the early 1990s for identifying intangibles in the light of value creation and performance (Bygdas et. al., 2004). Although it is quickly becoming more important in understanding and measuring its value in today’s typical firm as there is a genuine understanding of the economic value of idea, identifying the intellectual capital of a company is not easy, and requires a strategy to be defined beforehand (Johnson, 1999). Acknowledgement of the importance of knowledge is not enough; it must also be managed and tangible results obtained. The first problem is to define the intellectual material (intangible ones) which must be accounted for. To do so, it must be determined for what purpose it is to be used, and, definitely it is essential, transitory, daily information and the genuine intellectual capital to be distinguished (Stewart, 1997).The second problem is to define the ‘type’ of value of intellectual capital that can be estimated,
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considering as well, Johnson’s (1999) statement «…all elements with the potential to increase wealth are valuable» (p. 563). The resource based view of the firm considers the sustainable competitive advantages of the firm to be dependent on the internal resources the firm has at its disposal (Barney, 1986a; Wernerfelt, 1984). Many of these resources are characterized by an intangible quality. Actually, this may be the basis for their ability to create sustainable competitive advantage as they produce barriers to imitation through the causal ambiguity induced by their tacit, complex and specific nature (Reed and DeFillippi, 1990). As such, there has been a drive to develop an analysis of the intangible assets that make up these resources that are seen as key in determining the strategic management process of the firm (Hall, 1992; Barney, 1991). Barney (1991), stating that «Firm resources can only be a source of competitive advantage…when they are valuable» (p.6) identified four empirical indicators of the potential of firm resources to generate sustained competitive advantage. These were value, rareness, imitability, and substitutability. However, the difficult position for most firms trying to analyze their strategic resources is in attempting to determine theactual or potential value of the intangible assets of the firm. Traditionally, the value, or potential value (wealth) of a firm was seen in its ability to create a reasonable return through the use of tangible assets. In a mass manufacturing based-economy, the relatively small amount of value not explained by the efficient use of tangible assets amounted to an ethereal entity that accountants simply labeled ‘goodwill’ and that was largely ignored (e.g. goodwill was recognized on the books only after the purchase of a firm at a price above its book value before the acquisition). However, with the growth of knowledge-based economy, the potential value that this ‘goodwill’ represents is growing quickly. Some estimates have this value approaching 75% of the firm’s total market value. Using the qualifier of potentiality in the definition of value addresses a major problem confronted in determining the value of many intangible assets. Although it may be difficult to measure an intangible asset’s net present value that doesn’t mean that the asset isn’ t valuable. The true indicator of the asset’s potential to produce`wealth may be found in its expected value – a more elusive measure of value stemming from a decision making expected utility model and calculating using the probabilities of various states of nature (Johnson, 1999).
6. Intellectual Capital valuation methods Some of the economicsbased methods to valuate intellectual capital are (Ortiz, 2006):
Return over Assets (ROA) uses the average pre-tax earnings of a company for three to five years. This average earning is then divided by the average tangible assets of the company over the same period of time. The resulting ROA is compared with the company’s industry average to calculate the difference. If this difference is zero or negative, the company does not have an excess of intellectual capital over its industry average. So the value of intellectual capital is assumed to be zero. If the difference between the company’s ROA and its industry average is positive, then the company is assumed to have excess intellectual capital over its industry. This excess ROA is then multiplied by the firm’s average tangible assets to calculate an average annual excess earning. Dividing this excess earning by the company’s average cost of capital, one can derive an estimate of the value of its intellectual capital. Market Capitalization Method (MCM) is based on the capital markets premium. This method
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reports the excess of a company’s market capitalization over its stockholders’ equity as its intellectual capital. To more accurately calculate MCM, the historical financial statements must be adjusted for the effects of inflation or replacement costs. Using historical data may distort the measurement, particularly in industries with large balances of old capital assets such as steel companies. Direct Intellectual Capital Method (DIC) is based on measuring the value of intellectual capital by first identifying its various components. Once these components are accurately identified, they can be directly evaluated. It focuses on components of market assets such as customer loyalty, intangible assets, such as patents, technology assets such as know-how, human assets such as education and training, and structural assets such as information systems. Once these components are all measured, they can be aggregated to derive the total value of a company’s intellectual capital. Knowledge Capital Earnings (KCE). Proposed by Baruch Lev (2001 as cited in Ortiz, 2006) first one needs to normalize earnings 3 years before and the forecast for 3 years after. Subtracting the income caused by intangibles from the normalized earnings there is a portion of non-accounted earnings. This amount represents knowledge capital earnings and can be used for different ratios such as intellectual capital margin KCE/ sales, and operative knowledge capital margin KCE/ net income. The multiple linear regression model proposed by Nevado and López (2002, as cited in Ortiz, 2006) of the following form: MCM=X1*(CH*iH)+X2*(CP*iP)+X3*(CC*iC)+X4*(CM*iM)+X5*(CI+D*iI+D) Where: • MCM is the market capitalization method (market value-book value). • C are absolute monetary indexes related to investments done in some of the 5 • following fields: • HC Human Capital (Salaries + Training investments) • PC Processes Capital (preventive maintenance investments + Evaluation investments + Facilities investments) • CC Commercial Capital (Investments to customers + Outsourcing • Investments) • CM Communicational Capital (Marketing Investments) • CI+D Innovation Capital (Research investment + Patent investments + • Software andhardware investments) • it is an efficiency average of the above • As an example that contains the following efficiency indicators: market quota, 1-(salaries/sales), social action index, 1-(temporal employees/plant employees), 1-resigned+fired/#employees), motivation index, promotions/# of positions. • The model does not assign monetary values to the IC components; it is based on efficiencies and investments. • It could be useful to explain how IC behaves as well as the interaction and significance of every factor. Tobin’s q (2001, as cited in Ortiz, 2006) compares the market value of an asset with its replacement cost. If q is less than 1 then it isn’t probable that a company would buy more assets of that kind. If an asset were worth more than its replacement cost, the company would invest in a similar asset. It is a cost based approach. Economic Value Added (EVA) measures the monetary surplus value created on an investment. It is calculated using the following formula: EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project) Balance Scorecard is a management system that balances the financial perspective considering internal business processes and external outcomes of the business. Developed by Kaplan and Norton (1996) they described it as: “The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age 43 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.” The Balance Scorecard considers the customer, financial, internal business processes and the learning and growth perspectives combined with the company’s vision and strategy 6.1 Valuing intellectual assets: traditional , static, dynamic & real option models The traditional valuation tools such as relative valuation multiples, price earnings ratio or enterprise value do not fully capture how intellectual capital contributes to firm value. Although the discounted cash flow represents a more sophisticated approach to valuation than one based on multiples, it does not adequately or correctly address the complexities that intellectual capital-based competitive strategies engender (Sudarsanan, Sorwar, and Marr 2003). Sudarsanan, Sorwar, and Marr (2003) approach the valuation of intellectual assets through the concept of real options presenting first the categories of valuation models:. Traditional valuation models To value any asset there is a need to identify an income stream clearly identified with that asset. Alternatively the value of that asset may be determined through buy-and-sell transactions in a market. Valuation models may be broadly divided into two kinds: • Models that estimate the aggregate value of IC at a point in time. They thus estimate the value of the accumulated intellectual assets. We may cal them static models. • Models that value the investments in intangibles each at a time. Discounted cash flow models and real option models belong in this group. We may call these dynamic models. Static valuation models Residual income model A major problem with intellectual assets is their embedded nature that disallows the development of secondary markets. They are part of a bundle of physical, financial and intellectual assets. One approach is to value the bundle as a whole and then subtract the values of the physical and financial assets to arrive at the value of the intellectual assets. The residual earnings are then attributed to intellectual or knowledge capital and capitalized at an appropriate discount rate that is derived from correlation analysis of IC earnings and equity returns. This methodology, while innovative, may be subject to criticism since the choice of expected return rates for various components of capital are somewhat arbitrary. More importantly, the value derived from this procedure represents the collective value of all the intangibles the firm possesses and does not identify the values of the individual components of IC. Further, it is not clear how, not just how much, IC contributes to firm value. The process by which IC creates value is not delineated. The IC value is derived from a fairly static picture of the composition of a firm’s assets. What is missing is the dynamic nature of some of the IC investments. Dynamic valuation models Discounted cash flow model In contrast to the ‘residual income’ approach to IC valuation , the discounted cash flow (DCF) model in corporate finance projects the cash flows from investment in a particular asset throughout the economic life of that assets discount these cash flows at an appropriate discount rate. The present value of the 44 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
investments in the assets are subtracted to give the net present value of that investment. However, the DCF does not accommodate the option like nature of certain corporate investments and ignores managerial flexibility. DCF is thus a model that best captures the value of assets in place that generate relatively stable or predictable cash flows. It is a model that may still capture the growth opportunities arising from these assets in place. It is a model for those corporate investments that facilitate ‘competing for the world’ rather than ‘competing for the future’. Real option models -. Intangibles as real options While not all intangible assets share real option characteristics many of them are in essence real options that firms create through their activities, organic investments or acquisitions. Among these are: • customer relationship arrangements such as joint ventures, licensing agreements as well as informal relationships; • investment in human resources such as education, training & development, domain expertise, creativity, problem solving capability, entrepreneurial spirit, and ability to work in teams; • investment in information technology for knowledge management and enhancement of the capability to exploit organizational learning, expertise and resource; • investment in developing a unique culture that increases managerial flexibility, organisational learning, creativity; • practices and routines that identify growth opportunities and facilitate exploitation of such opportunities • intellectual property such as patents, copyrights, trademarks, brands and registered designs. • Research and development. Investments in these intangibles do not generate immediate payoffs. Indeed they are considered costs and often expensed in company accounts. But they are often small, exploratory and speculative investments made in expectation that they will lead to new growth opportunities and unique competitive advantages. Some of them create switching options that allow the firm to switch existing resources to alternative uses e.g. customer relationship information that allows the firm to switch its focus on from low value customer segments to high value customer segments.Regarding this approach, it is explored how intangible assets that have come to dominate the valuation of many firms can be valued using advances in real option valuation. The philosophy of this approach is the rising proportion of intangibles in the overall value of firms, problems in identifying, measuring and valuing such intangibles, and the inadequacies of traditional valuation tools. Intangibles in general contribute to frms’ competitive advantage and value creation as they give rise to growth opportunities. Exploitation of these growth opportunities require investments and whether such investments will be made depends on the result of initial investments to develop the intangible assets. Thus intangible assets represent on options to pursue growth or to abandon such opportunities. Given this fundamental similarity alternative real option valuation models can be set to illustrate how some of the intangible assets may be valued.While it is conceptually easy to regard some if not all intangibles as real options, in practical application estimating some of the model parameters may be difficult. Even the real options framework may not provide easy solutions to the problem of intangible
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valuation, it still provides a challenging way of thinking about intangibles, their nature and how they contribute to value creation (Sudarsanan, Sorwar, and Marr, 2003).
7. Measuring the stock and flow of intellectual capital components in the firm Johnson (1999) developed a framework (Figure 1) based on the IC concept that can be used to identify and measure the stock of intangible resources that have the potential to give the firm a sustainable competitive advantage. IC is the collection of elements of intangible assets that utilize human intellect and innovation to create wealth. It has been displayed that the elements of IC can be measured both integrating internal data on stock and perceptual data obtained through survey work. While some elements of IC, such as Innovation Capital stocks, lend themselves well to the use of internal data, others, such as Relational Capital, are socially embedded and should be measured applying techniques designed to extract the perceptions and understanding of important stakeholders. The intangible nature of the types of assets that make up the IC framework makes mere counting of stock extremely difficult. Even an intangible asset that can be physically counted, such as number of patents, gives an estimation of limited value without taking into account the use such patents have in providing sustainable competitive advantage for the firm. Two general measurement techniques for determining quantitative and qualitative indicators of the stock value of IC elements in the firm were identified. The first is the physical measurement of stock using internal accounting data that is for the most part non-financial. The second is the use of sociological measurements applying survey techniques of internal and external observers. There may be some trepidation in applying some measures to determine the value of these assets. However, considering the intangible nature of these assets, these measures are considered most appropriate. Future work regarding exploration of a relationship between chosen measures and financial outcomes will need to be determined to make the approach more precise, effective and valuable for any firm. However, given the definition of value as the potential to produce wealth (Johnson, 1999), the most crucial issue refers to identifying the potential for producing wealth not the actual production of wealth, as well as, that something may be extremely valuable in one state and valueless in another. Concluding, the concept of expected value as the sum of the probability of several states in nature, should be studied. All potential value is predicated by probability, or possibility, of any particular state of nature, and thus, actual value involves risk and luck. This factor should also be considered when valuing much of the intangible assets of the knowledge firm. Capital elements may be valuable just as investments but they do not come to the firm without risk. There will be various states in nature where utilization of intangible assets produces wealth with each determined by a probability or likelihood of happening. The contribution of this IC measurement approach relied on the development of useful indicators of IC stock value that correlate well with financial success, being valuable in this way for the firm. The pertinent point, generated from a Balance scorecard philosophy, is that non financial indicators can be valuable in tracking performance as long as they are connected to strategic goals of the firm which are ultimately financial in most cases. As this approach emphasizes on the stock of intangible assets that provide value to the elements which play an important role in producing wealth within the
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knowledge-based firm and their value is being measured by application of the Balanced Scorecard method, however, the flow and interaction of these assets are probably more important in the creation of real wealth for the firm. Johnson (1999) suggests that the real potential for value is in the systemic interaction of the various elements of the framework, where in combination with more tangible measures may be useful in determining individual circumstances and thus the individual firm’s ability to create a sustainable competitive advantage. Thus, future work into the concept should take a systems approach where a system can be defined as a whole being consisted of parts that interact with each other (Senge, 1990; Kauffman, 1980). Although these interactions might be potentially complex, however, they may be simple when compared to the actual interactions occurring in the firm environment where make possible the individual analysis of any particular firm and the measurement of value inherent in the system. So, each firm can examine its own situation using a combination of both tangible measures and in depth examination of interaction patterns among the different elements of IC.
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Market Value
Financial Intellectual Capital Capital
Tangible Assets Human Relational Structural Balance Sheet Capital Capital Capital Income Statement
Leadership Cultural Ideas Capital Capital Capital Capital
Process Capital Intangible Assets Innovation Experts, Managerial Capital Competence
Intangible Assets Intangible Assets Intangible Assets Intangible Assets Knowledge Based Customer Relations Patents, Trademarks, Work processes Workforce Supplier Relations Knowledge databases Trade Secrets Employee Attitude Relationship Networks
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
Figure 1 Intellectual Capital framework: its relationship to market value (Johnson, 1999). According to this framework there are three elements of IC: 1. The Human Capital, as the force behind the human intellect where all human ideas and innovations first emerge, 2.The Structural Capital, as the structural ability of the firm to utilize human intellect and innovation to create wealth, that allows for the creation of wealth through the transformation of the work of Human Capital, 3. The Relational Capital, as the ability of the firm to interact positively with business community members to stimulate the potential for wealth creation by enhancing Human and Structural Capital. General types of intangible assets associated with each element are mentioned as well (see appendix, Figure 2).
8. The nature of liabilities and the misunderstanding of intangible liabilities
The recent interest of understanding the possible existence of intangible liabilities makes necessary to start from the basics and clarify terminologies. In accounting a liability is a claim on the assets (therefore decreasing its value) of a company or individual excluding ownership equity. It represents a transfer of assets or services at a specified or determinable date. The firm or individual has little or no discretion to avoid the transfer. Liabilities represent what the business owes to another person or entities known as creditor and it is also possible that the event causing the obligation has already occurred (Ortiz, 2006). Trying to compare the management term “Intellectual Capital” to the accounting “capital” or “equity” term and applying the Intellectual Capital =Intellectual Assets-Intellectual Liabilities analogy is a misunderstanding of the Intellectual Capital=Intangible Assets concept and evolution explained before (Ortiz, 2006). It would also be a concept misinterpretation trying to explain the decrease of an intangible asset value due to the existence of an intangible liability by the simple inexistence of a creditor that would receive the intangible assets transferred. The intangible asset variation value is better explained by an appreciation or depreciation due to the context (market forces, speculation, etc) and the effective or ineffective use/management of them. When concepts like bad public image, bad word-of-mouth, weak strategic planning processes, dangerous work conditions, potential environmental cleanup, potential product tampering or poor corporate reputation are tried to be considered as intangible liabilities it should be noticed that they are only the ineffective use of the intangible asset in some cases and in others are only potential expenses, but in any case a creditor would exist. Neither potential expenses nor ineffective asset use should be considered as intangible liabilities because they differ in their nature. It is understandable that as in accounting the two reasons why an asset varies its value are liabilities and expenses, an analogy for intangible assets might work too, but it doesn’t. Then, what could be considered as an intangible liability? An immaterial payment promise, which decreases the value of the intangible assets by giving part of them to a creditor.
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8.1 Context, the source of intangible value variation
From a managerial point of view, is possible to address the variation issue considering the context where interrelated conditions occur. It should be considered that as in many other assets, the valuation of an intangible is a matter of perception. Some of the components of the intellectual capital are rational, directly measurable, but others are of an affective and perceptive nature. The importance of context when valuating IC has been briefly suggested in papers by Rodov and Leliaert (2002). They expressed that management should assign the values they considered appropriate to IC according to the company. Also Chaminade and Johanson (2003) addressed the perception difference regarding to knowledge management in two different companies at two different European countries. Context should involve time (when the value of IC is measured) and location (depending on the region IC will vary). As tangible assets, the components’ value of IC will vary depending on the moment and the region where they are. Some assets are more valuable in one region (state, country, hemisphere, etc.) than in other due to perception, resources, supply, demand, fashion, etc. Even for companies with almost everything equal if they are in different regions, the IC value will vary. So far, the usual method to assign a value for an intangible and identify its variation has been a financial/accounting linear approach, which doesn’t consider the interaction of all the variables that include intangibles, tangibles and the context. It is necessary to address the problem as a dynamic complexity where all the parts interact. Quantitative and qualitative models are needed to understand the behavior of intangibles and their valuation as a change in one part of the system affect the whole system (Ortiz, 2006). IC fits the description of a system, which is a collection of parts organized for a purpose. The purpose of IC is the same as any other asset, to be a source of future benefits with the only difference that has no physical existence. IC as any other system, again, sometimes fails to achieve its purpose due to a lack of proper interaction, design or external disturbance. That is why IC value variations exist. From a system dynamics point of view the different identified components of IC interact with each other’s as a system and the context constantly interacts as an input/output source, also as part of the system. The context constantly affects each and every IC component causing disturbances and affecting the total value (Ortiz, 2006).
9. Discussion Many models are financial valuation models that use money as unit of value(see appendix, Table 1). Economic Value Added™ is used for both improving internal management and external reporting. It is based on an analysis of the economic value that is added in a company, taking into account the cost of the capital needed to create that value.. Stewart (1997) states that measurements could be useful for 50 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
improving internal management and external reporting that is important for organizations and shareholders and not only on the basis of money and cost. The calculated intangible value method is based on the assumption that the premium on a company's value is a result of its IC. Cost, market and income approaches are more 'traditional' approaches to financial valuation that are used for various transactional and statutory purposes. The cost approach is based on the principle that an investor will pay no more for an investment than the cost to obtain an investment of equal utility. The market approach is based on the principle that in a free and unrestricted market, supply and demand factors will drive the price of any good to a point of equilibrium. In the income approach the value of IC is the value of the expected economic income generated by this capital. The intellectual capital audit is a method to internally manage intellectual capital. It uses a range of indicators that have yardsticks attached that represent the optimal state of the indicator. Only the balanced scorecard groups financial and non-financial indicators and accompanying norms . Among these methods no value assessment methods were found. They do not use values, norms, or other yardsticks and we therefore cannot consider them valuation methods. Some claim to have a purpose in both improving internal management and external reporting thorough diagnosis is needed to determine the specified problem of the situation at hand. This is especially essential when the intention is to improve the internal management of an organization. There can be many reasons why a company is performing suboptimally or poorly. There can be many ways to optimize a company's performance. Valuation or measurement may or may not be the right solution. To check whether a valuation or measurement method is the right tool for the job the method should include a diagnosis phase. This phase is missing in all methods. As a result there is a clear danger that the methods turn out to be 'solutions in search of a cause'. Another problem is to define the intellectual material (intangible ones) which must be accounted for and in order do so, it must be determined for what purpose it is to be used, and, definitely it is essential, transitory, daily information and the genuine intellectual capital to be distinguished (Stewart, 1997). It is not easy economic terms to address such issues. The array of problems that is being addressed by many of the methods is so broad that is seems questionable whether they all can be solved using one method. Yet this is what some authors claim. The problem definitions of Edvinsson and Malone (1997), Stewart (1997), Sveiby (1997) and Roos et al. (1997) cover a number of different problem categories within both the internal management and the external reporting domain. They claim there methods are a 'jack of all trades'. More empirical evidence is needed about the effectiveness of these methods to cover such a broad selection of problems. The absence of yardsticks may explain why Rylander et al. (2000 as cited in Andriessen, 2004) found that users in Sweden were not satisfied with the information on intellectual capital as it is presented in annual reports. "The link to value creation is unclear and the information is therefore perceived as difficult to interpret and does not provide deep enough insights to deliver any real value to users" . Intellectual capital research suffers from too much focus on solutions and a lack of focus on organizational problems. Within the intellectual capital community not enough research has been done into the nature of the problems that valuation or measurement addresses. As part of the consolidation
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process more evidence needs to be generated about the problems that can be solved using valuation or measurement methods. The methods themselves can be improved by adding a diagnostic phase that will allow users to identify what the problem in their organization is and to judge whether a specific method can help in solving it. Finally, existing methods vary with respect to their approach. The language used is often not very consistent. A distinction should be made between financial valuation methods, value measurement methods, value assessment methods and measurement methods. As part of the consolidation process within the intellectual capital community, more research is needed into the strengths and weaknesses of each of these approaches, related to the type of problems that need to be solved. This must lead to a more complete and empirically grounded 'why' by 'how' matrix that can help practitioners to choose the right tool for the job (Andriessen, 2004).
10. Conclusion The management of intellect lies at the heart of value in the current “knowledge era” of business. Continued research of this phenomenon should show that organizations with a high level of intellectual capital will be those in which the value-added service of the firm comes from deep professional knowledge, organizational learning. Managers, analysts and researchers should also be wary of looking for a formula of intellectual capital. By definition, the tacitness of intellectual capital may not allow analysts to ever measure it using economic variables. A warning must be sent out to those accountants and financial analysts who are asking the question, “How much is my intellectual capital worth?” A formula may never exist. That is not to say that metric development is a waste of time. Longitudinal examination of metrics as well as benchmarking against industry norms can help managers in examining their own intellectual capital. In this case, examining the processes underlying intellectual capital development may be of more importance than ever finding out what it is all worth (Bontis, 1998) The above approaches showed the stage of research in each of the different areas that drive the measurement of IC. In order value of IC in organizations to be assessed, its contribution towards the target areas that are valuable for the organization should be approached theoretically and empirically. Financial indicators are theoretically oriented and not empirically tested. Many areas (such as measurement of IC contribution to strategy development, measurement of strategic intellectual capital influence on strategy formulation) have had little empirical research attention. It should not be neglected that Intellectual capital performance measures in compensation systems provide indicators of future business performance in contrast to what accounting measures provide (Marr, Gray, Neely, 2003). They are valuable in providing information for the evaluation and motivation of managerial performance. Is this, financially, be measured? Also, regarding the economic approaches to IC measurement, there is luck of attention on an in depth analysis of IC context examining as well the IC elements as a system that interact to each other. In summary there is a need for broader theory to be built exploring in depth IC context and interactions among elements in a systematic manner. Baruch Lev (2001) states that to advance knowledge in the area of intangibles, "theoretical principles should be subjected to empirical examination and observation" Lev 52 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
(2001). The above discussion has revealed many research avenues which scholars might consider pursuing to take the field of IC measurement further (Marr, Gray and Neely, 2003).
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APPENDIX
Cultural Leadership Capital Capital
Mediates Mediates creates
Ideas Innovation Relational Capital Capital
aids
creates
creates
Process
Capital
Figure 2. Intellectual Capital elements(Johnson, 199
Table 1. Classification of methods (Andriessen (2004)
WHY \HOW Financial Valuation Value Measurement Value Measurement
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Assessme nt Improving • Economic Value • Balanced Scorecard • Skandia navigator Internal (Kaplan and Norton, • (Edvinsson and Management Added™ (Stewart III, 1992, 1996ab, 2001) Malone, 1997) • Intellectual capital 1994) audit (Brooking, • Intangible asset monitor (Sveiby, • Market-to-book ratio 1996) 1997) (Stewart, 1997) • Intellectual capital index • Tobin's Q (Stewart, (Roos et al., 1997) 1997) Improving • Economic Value • Skandia navigator External • • (Edvinsson and Reporting Added™ (Stewart III, 1994) Malone, 1997) • Market-to-book ratio • Intangible asset monitor (Sveiby, (Stewart, 1997) 1997) • Tobin's Q (Stewart, • Intellectual capital index (Roos et al., 1997) 1997) Transactional &Statutory • Calculated Intangible • • • Motives Value (Stewart, 1997) • Cost, market and income approaches (Reilly and Schweihs, 1999) (Smith and Parr, 1994)
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Integrating David programming model with Balance Scorecard (BSC) in
order to decrease or eliminate the weaknesses of David’s model and
performance improvement (case study: Mahan air lines)
Mohammad reza Shojaei* 1 , Associate professor and Faculty member of Shahid Beheshti University,Tehran, Iran [email protected]
Maryam Mottaghi 2,Department of Management, Ershad Damavand University, Tehran, Iran [email protected] (Corresponding Author)
Abstract
Nowadays in this competitive world lots of manufacturing and servicing companies have to resort to new
management approaches. Among these, we can point to new approaches to performance evaluation that
play signification role in improving the performance of an organization. Balance score card is a recent
innovation management that evaluates the organization in four main aspects of management and its aim is
provide a comprehensive view of business for managing directors. The purpose of this paper is to study
the integratingDavid’s Model with balanced scorecard and implementation of BSC in order to decrease or
eliminate the weaknesses of David’s Model and organization performance improvement in four
perspectives. The chief executive officers of Mahan airlines are the statistical population of this research.
This population includes 70 persons and the sample size of 60 persons is determined based on Cochrane
formula and simple random sampling. The content validity and reliability was confirmed by calculation
1 . Ph.D in Strategic management 2 . MA in Business Administrator – International Business 58 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
Cronbach’s Alpha. The result of this research shows that integrating these two models significantly results
in performance improvement and David’s model weaknesses in our statistical population.
Key words: David’s model, balanced scorecard, Mahan airlines performance, improvement
Introduction
In the last decade, global competition has risen quickly because of rapid changes in technology and extra
diversity of products and it causes the organizations to focus the role of continuous improvement of
performance as competitive and strategic needs throughout the world. Today organization extremely uses
performance measurement, directions of evaluation, control and business processes improvement to keep
and reinforce their competitive advantage.( Ghalayini , A.M & Noble ,J.S,1996) Nevertheless the recent
studies show the facts that classic performance measurements based on accounting system are not
sufficient (Wongrassamee ,P.D & Gradiner,J.E.L.simmons, 2003). For example, eight limitations of
classic measurement that have been identified include: They have been based on classic costs
management systems- using backward measurements- do not participate in strategy- performing them is
difficult practically and they are inflexible and discrete, in conflict with the accepted theory of continuous
improvement and ignore customer’s need. The studies also find limitations related to classic production
management and its strong focus on increasing productivity, cost reduction and increases in profit, that
might somewhat decrease the attention to quality improvement, reliability delivery. As a result of these
classic limitations, non-classical performance measurements emerged in the literature (Dixon, N.M &
Et.al, 1990). These features were essentially related to organization strategy and based on non-financial
goals. Therefore multidimensional and integrated performance management systems were developed.
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According to performance measurement revolution we recognize two separated categories include ones
that have self-measurement and another category consists of those new performance measurement
systems that Design to help managers to measure and improve business processes called Balanced
scorecard framework (Kaplan and Norton, 1992). In 1992 Harvard professor Kaplan and Doctor Norton
published a paper about a new approach to performance measurement as balanced scorecard that was
developed during a research project involving 12 companies (Ibid, 1992). The balanced scorecard consists
of a set of criteria that gives managers also a quick perspective of their business. The balanced scorecard
was known as the one of the useful, low error and effective 15 management tools until 2001 (Rigby k.
2001). and the number of its users added every day. Research shows about 70% of American companies
utilize these tools or are looking to do it (Management Encyclopedia). The balanced scorecard evaluation
approach helps organization to win over two key problems: evaluating the organization performance and
strategy implementation. Introduction of balanced scorecard with attention to its promotion in 3
generations is to clear its vital duty to make connection between balanced evaluation approach
measurements through a series of casual relationships(Niven R. Paul. 2008 ).
Research objective literature:
The strategies are focal point for organizations movements and inspiration for managers. The strategy of
an organization is the manager’s plan and instrument to obtain the market position, guide performances,
customers’ satisfaction, and success in competition and achieve the organizational goals. Chandler (1962):
strategy is “to determine long-term and essential goal and purpose of a company”. Child (1972):
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strategy is a set of fundamental or sensitive choices about the result of an activity and its tools. Keyy
(1999) Business strategy is about the coordination between potential and inner organization’s capabilities
and its external environment.Drucker (1995) defines strategic decision such as: All decisions concerning
the organization targets and the ways to achieve them. (Rahimi, 2007) According to these definitions,
strategic affairs called strategy if they have at least three conditions: 1. longtime lasting. 2. Be in a
competition environment. 3. be crucial. Thus the strategy is a special kind of ways and approaches to
achieve goals if these three conditions are met, it means that experts have different point of view about
strategy segmentation because it is possible to classify them by different tastes and standards. It has been
used to classifying types of strategies in the most practical method: 1.Main strategy 2. Sub strategy 3.Task
strategy 4.Macro strategy.
Strategic management: in 1980 strategic management rose to make more coordination and solidarity in
organization goals and certainty of operation and implementation of these plans (Ali Ahmadi, Ali Fateh
Ali, Mehdi Taj Din, I. 2002). Facing various events such as organizational movement, market situation,
empowering against competition, combining them and how to treat each one is understandable and
traceable in strategic management concepts. Therefore, the main priority of management practices is to
provide, design, execute and evaluate the strategy. Priority actions are: 1- The necessity forward-looking
and the quality of business leadership 2- The necessity of attention to harmony and coordination
(Thompson and Strickland 1982). Strategic management could be defined as: the art and knowledge of
designing, implementing and evaluating of multi-functional decision that enable the organization to
achieve its long term goals. Strategic management focuses some factorsto obtain organization success:
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cooperation of management, marketing finance, production (performance) and research and development
computer information system (David,F.R. 1999).Strategic management has three levels: Definition of the
strategies, implement the strategies and evaluation of the strategies. William Wirden from Hershi
Company knows the reason of his company success in strategic management and say: the path of
company’s life is determined by planning for long periods of time and we undoubtedly are going to rely
on this procedure and reinforce it in the future(David,F.R. 1997). The abstract of preparation and
definition of a good strategy is to make sufficient strong position in market and sufficient empowerment
to achieve successful performance despite the events, delays and unforeseen cost (Bakhtiari,P. 1982).
Strategic management is a term to describe decision-making and operating process. It includes the
decision procedure and tasks which lead to the creation of one or more effective strategies to achieve the
goals. (Ali Ahmadi, Ali Fateh Ali, Mehdi Taj Din, I. 2002).
Strategic planning: definition of strategy can be done in different ways in different organizations that one
of the styles is strategic planning. Strategic planning process provides an attitude and analysis of the
organization and its environment. It explains current situation of the organization and identifies effective
key factors of success (Fry.L, Fred & Stoner.R, Charles.1995). Definition of strategy in David planning
model contains five steps:
1. Determining the organization mission
2. Studying external factors of the organization
3. Studying internal factors of the organization
4. Determining the long-term goals of the organization
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5. Evaluating quantity of different option of identified strategies toadapting internal and external factors
and selecting the best one (designing, evaluating, choosing strategies) (David,F.R. 1999). Although
determining strategic and operating plans is a difficult and complex process but it is harder to run
Successfully. Many organizations failed to execute their full strategies. This is not because of designing of
strategies and performance planning of the organization, but perhaps the lack of a strong framework to
integrate personnel’s and process operation into organization goals makes this fail
(Creelman,j.Markhijani,N. 2008). controlling and evaluating strategy is a process that should be
considered as an approach to determine limitations of achieving strategic goal(Ali Ahmadi, Ali Fateh Ali,
Mehdi Taj Din, I. 2002). one of the important steps of strategic management in organizations is evaluating
and control. Performance measurement is a result of strategic and operational planning and considers
feedbacks and its necessity and importance to the organization (Rokni Nejad, Mehrdad.2008). Today one
of the manager’s duties is to define a strategy which brings a competitive advantage for the organization.
Manager’s operational procedures to execute designed strategy successfully are the most important
element of an effective and qualified management, this is necessary in addition to arrange and provide the
required team. A good strategy and its successful execution are the most reliable signs to recognize an
efficient management. The strategy’s value depends on two factors: first how much it makes us
competitive advantage. Second how much it costs our competitor to fill this gap between us. Both of these
factors refer to nature of opportunity and its origin. And opportunity means causes of advantage
incompletely. There is “potential” opportunity for everyone but actual opportunity belongs to specific
persons and organization who complete the opportunities factors (Rahimi, GH. 2007).
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The second part of David planning model is to execute the strategies. This part also has 2 steps. In the
first step the annual organization goals are defined according to chosen strategy that will be the basis for
budget allocation and evaluating the manager’s performance and monitoring the progress of tasks and
determining their priorities then, the organization policies is set up by these annual goals. The
organization policies clear the expectations of staff and managers and it causes the success rate increases
(defines annual goals and policy) in the second step, required resources and facilities for executing the
strategy in organization is allocated. Resource allocation in organization often occurs as budgeted costs
and human resource, however other resources might be necessary for executing the strategies (resource
allocation) (Ali Ahmadi, Ali Fateh Ali, Mehdi Taj Din, I. 2002). The third part of David’s strategic
planning approach is evaluating the strategies that happen in last step. In this step, an active information
system is used to evaluate and analysis the process of implementing the strategy to correct any problems
that could occur in the way of execution (calculating and evaluating the performance measurement).
David’s strategic planning model: mission, vision and value statements- external threats and opportunities
analysis- internal, weakness, threats and opportunities analysis- define long term goals- define evaluation
and choose strategies- define annual goals and policies- resource allocation calculating and evaluating the
performance measurement- This is David strategic planning model, strategic management. According to
this model strategic management has three main parts includes planning, acting and evaluating the
strategy and they are interconnected to each other (David,F.R. 1999). David’s model, use a
comprehensive framework to plan the strategies; this helps strategists to define, evaluate and choose the
strategy (Aarabi, M. and Agha Zadeh, H. andNezami Vand Chegini, H.1385).
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Start phase
Define the mission and mission statement of organization
Input phase
Internal factors evaluating matrix External factors evaluating matrix
Comparison phase
Internal and external matrix SWOT matrix
Decision making phase
Strategic quantitative planning matrix
Drawing 1: comprehensive framework of strategy definition (Aarabi, M. and Agha Zadeh, H. andNezami
Vand Chegini, H.2006)
The component of David’s model: - Mission Statement: is a statement that distinguishes the organization
from other organizations and clarifies the range of activities interacted with the product and market
(David,F.R. 1997). Vision: in the vision statement of the organization these question should be answered:
what we want to be? Indeed vision is exactly thing that makes sense to the movement from a static world
of mission and values to a dynamic world of strategy. It is a verbal image of the final goal of the
organization that could offer 5 or 10 or 15 years later (Niven R. Paul.2008)Values: should be considered
us a provider of a framework of principles in which decision and actions are made in all aspects of
defining, executing and evaluating the strategies (Ibid,1386). Internal analysis : every organization has
strengths and weaknesses in its domain of functional units those are not equal in the circle of units, and
the internal analysis must be done by gathering, classifying and evaluating these strengths and 65 ISSN 2076-9202 International Journal of Information, Business and Management, Vol. 7, No.1, 2015
weaknesses of the operations (David,F.R. 1997).
External analysis : the purpose is to gather a final list of the opportunities that could be avoided. Strategic
Targets: are the goals that the organization should be achieved them by defined planning Policies: are
tools in which to gain annual goals. It means guidance’s, requirements and approaches that should be
observed by the organization to achieve the goals. Executive planning : less than 10% of defined
strategies execute successfully so the phase of executing strategies is so important. Short-term goals : or
annual goals that organization use them to achieve long-term goals, they should be measurable quantity,
read challenger and compatible with other goals and be prioritized. Control andevaluation indicators : 3
main activities should be done, analysis internal and external factors that are the basis of the current
strategies, calculating and evaluating the operations and the corrective acts (Ibid, 1997). David’s
comprehensive pattern of strategic management is shown in drawing 2: feedback
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External
analysis
Measuring Resource Define Define Define Mission and calculate allocation annual goals evaluate and long term define the operations and policy chose the goals strategy Internal analysis
Evaluate the strategy Exe cute the strategy Define the strategy
Drawing 2: David comprehensive patter of strategic management (David, 1998)
Create a strategy focused organization: results of a research on 275 managers have shown that the ability
of executing strategy is more important than the quality of strategy (Kaplan R.S. & Norton D.P.1992).
These managers mentioned executing of the strategy as the most difficult factor in evaluating the
organization and the management. This result is perhaps surprising, because in the past two decades
management theorists, and business consultants and issues have focused on how to develop the strategies
(that will lead to better performance). Developing formulation a strategy never seems never to have been
important. Steel other observers agree with the ideas of managers in this research that the ability to
execute the strategy could be more important than the strategy itself. In the early 1980s, a research by
manager consultants showed less than 10% of defined strategies had been successfully executed (Ibid,
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
1388). The balanced evaluation approach helped successful organizations to build a modern management
system. A system that manages planned strategy. This modern system has three specified parts:
1- Strategy takes place in the center of organization planning .
2- Extra ordinary focus on strategy.
3- All employees are mobilized for the fundamentally different performance. The principles of a
strategy- oriented organization:
Training the manager
Information Business units BalancedBalanced technology
Straterystrategy
ScoreScore card card
Budgeting and
Human resources
Drawing 3: Aligning and focusing resources to the strategy(Kaplan and Norton, 2009)
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
The same principles have been observed in practices that are called the principles of a strategy-oriented
organization which are shown in Drawing 4:
Mobilize the organization for change through management
- Mobilization (the organization) - Governance process - Strategic management system
Balance Translate the strategy to operational d Make strategy a continual process terms - Link budget and strategies - Strategy maps - Analytics and information - Evolution measures (balanced systems
score card) - Strategic learning
Score
Align the organization to the strategy Make strategy every one’s every day job - Corporate role - Strategic Awareness - Business units synergies - Personal Scorecards
- Support units synergies - Balanced paychecks
Drawing 4: Principle of a strategy- Focused Organization (Kaplan and Norton, 2009)
Evaluation: evaluation means to measure operations by comparing the current situation with the desired
or ideal state based on pre-determined criteria which posses certain characteristics. In general the
scorecard system could be known as a process of measurement and scaling and comparison the amount of
and access to ideal situation by standards and certain attitudes in certain domain and certain period of
time in which to review, correct and improve (Rahimi, GH.2007). Any attempt to achieve success, should
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
be within framework and improving the organization operation should be based on a process called
“operation cycle”. Any improving plan should be started by measuring and evaluating. Balanced score
card as an evaluating system: balanced score card is known as an performance evaluating tool and an
executing strategy tool also to define organization alignment, investment and information today it is
known as a general and comprehensive framework for organization changes. Scorecard’s components are:
strategic maps, indicators, rate of measure, Casual relationship, and organization strategic goals. These
components are introduced to separate the goals among 4 point of view that are expressed in the
following (Bakhtiari,P.1982). Balanced scorecard is an approach to evaluate non financial measures. The
comprehensive balanced scorecard system is a management system that enables organizations to make
their vision and strategy clear and actual if the establishment of this system was complete and successful.
Then the strategic planning system can be executed (Ibid, 1387). Johnson and Kaplan also believes that
the organization is focusing and motioning on accounting information that is suitable for external
financial reports and using this information to performance measurement is in dispute. Further more
financial measurements do not offer a complete vision of the managers’ performance (Namazi, M. and
Ramezani, Amir. 2002). Balanced scorecard provides a good composition of financial and non-financial
measurements (Bostaniyan, J.2005). This concept as an evaluating system of commercial performance
spread believing that “current evaluating performance approaches that emphasize first and foremost
financial accounting measures are obsolete”. This inventor approach is able to consider software or
implicit factors that were immeasurable or cheap. “Balanced scorecard” term makes harmony between
short and long term goals, financial and non-financial, directorial and functional indexes and inner outer
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dimensions (Hepworth ,paul.1998). Kaplan and Norton explain: balanced scorecard transforms
organization mission and strategy to a group of comprehensive performance measurements and provides a
framework for management and strategic assessment (Ibid, 1998). Balanced scorecard is a conceptual
framework that transforms organization macro goals in to measureable indicators and provides a balanced
distribution between critical financial areas, customers, internal processes, growth and learning (Alvani,M
and Seyed Naqvi, M.A.2003 ) Considering its improvement in 3 generations, balanced scorecard’s critical
task is to connect measures of evaluation to each other through a series of casual relationships (Niven R.
Paul.2008). First generation balanced scorecard has 4categories which have 4 aspects. The balanced
term in balanced scorecards means: 1- balancing financial and non-financial indicators 2-balancing
inward-looking and out-word looking measures. Balancing forward measurements that focus on future
activities and backward measurements that focus on past activities. The 4 aspects of balanced scorecard
are: a) financial measurements. b) Customer measurements. c) Performance measurements. D) Growth
and learning measurements. The basic framework of balanced scorecard is shown in drawing 5.
Financial perspective Goals measures
Internal business Customer perspective goals perspective measures goals measures
Learning and growth perspective goals
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Drawing 5: balanced scorecard (basic framework-targets) (Kaplan and Norton, 1992)
Second generation balanced scorecard: balanced scorecard inventors in their second paper in 1993,
considered balanced scorecard not only as a measurement system but also a management system and
focused its role in vision mission and strategy of the organization (Rigby k.2001). Drawing 6 shows the
advanced primary balanced scorecard:
Vision statement business unit define mission
statement vision
The ability to Internal processes Customers Stockholders If the vision growth and internal perspective customer perspective Financial realized what innovation growth perspective is the and innovation different? perspective
What are the key success factors
What are the critical measurements?
Drawing 6: balanced scorecard (the second generation- 1993)(Rigby k.2001).
Third generation balanced scorecard: in 1996 Kaplan and Norton gave a more developed style of
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
balanced scorecard as a strategic management system (Kaplan R.S. & Norton D.P.1997). They
explained: classic management system are unable to connect long-term strategies and short-term tasks,
but mangers who use balanced scorecard are not forced to focus on short term financial measures as
unique performance measures, and balanced scorecard empowers them to start 4 new management
processes that separately or in combination help to make connection between long-term strategies and
short term tasks, this process is shown in Drawing 7. Strategy map: next development of balanced
scorecard was the introduction of strategy map (Mortinsons& Davison,Tse.1997)Strategy map actually
is the use of casual relationships in balanced scorecard. These maps are given to transfer a clear concept
of strategy about how to communicate their functions with organization general goals and empower them
to act collaboratively to gain desired objectives(Kaplan R.S. & Norton D.P.2001).
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Financial
Objectives Measures Targets Initiatives
To succeed financially, how should we
appear to our share holders?
Internal business process Customer perspective perspective
To satisfy Objectives Measures Targets Initiative To our Objectives Measures Targets Initiative achieve sharehold s s our Vision ers and vision, customer,
how And what should strategy business we processes
appear must we to our excel at? customer
?
Learning and Growth Perspective
Objectives Measures Targets Initiatives
To achieve our vision, how will we
sustain our ability to change and
improve?
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Drawing 7: Third Generation balanced scorecard-1996(Management Encyclopedia, 2001)
Integrating David model and balanced scorecard: the main difference between David’s model and
balanced scorecard is in the execution phase. In this phase all organization’s units, processes and in
general the all organization’s coordinate with planning strategies and the necessary integration will be
created in the organization that the other models lack this ability. Mahan airlines is a strategy-focused
organization and in this organization strategic planning is the basis of long-term planning’s and goals. The
organization’s planning utilize David’s model. Most models have weakness in implantation, evaluation
and controlling, in this organization using balanced scorecard chiefs decided to decrease or eliminate the
weaknesses in implementation, evaluation and control.
Balanced scorecard implementation in Mahan Airlines
Creation of the first balanced scorecard could be considered as a systematic process which is about
translating organization strategy and mission into targets and performance measurements transparently.
This project needs an architect who makes a framework for the process and makes it easier. Also provides
required information that balanced scorecard needs them (Kaplan and Norton, 1996). First of all balanced
scorecard implementation in the organization needs 2 preliminary steps that are essential: 1) introduce
balanced scorecard in the organization 2) define implementation executers. After doing these 2 steps and
considering Mahan’s special features, performance measurement designing and implementing was
executed by balanced scorecard. The basis of performance measurement by balanced scorecard is
International Journal of Information, Business and Management, Vol. 7, No.1, 2015
improving the effectiveness of the plans and organization performances in 4 perspectives (financial-
customer- internal businesses- growth and learning). Researches and studies has shown in all of these
models there is a strong planning but in many of these models there are weaknesses in implementation,
monitoring and evaluation. We know balanced scorecard as a strategy phenomenon of this century and is
the best instrument for implementation, evaluation and monitoring. The purpose of this study originally is
to create an excellent planning in addition to a good implementation, higher level of evaluation and
control in the organizations that appears its effectiveness and efficiency of performance improvement. in
this article we will see if integrating David’s model and balanced scorecard results in performance
improvement or decrease or eliminate weaknesses of strategic planning of this model. The importance of
this issue is to improving the performance and as a case study in Mahan Airline. According to researches
and studies, David’s model among strategic models is one of the most popular that its weaknesses are in
implementation, monitoring and evaluation. If we could integrate David’s model with balanced scorecard
in order to compensate for David’s weaknesses in implementation, evaluation and monitoring of strategic
planning. Therefore the main purpose of this study is David’s model performance improvement and
covering its weaknesses through integrating it with balanced scorecard and according to considered
population it could result in more appropriate planning in fleet aviation of the country and helps managers
to decision and performance evaluation.
Methodology
In this study at first there was an extensive study about the concept of David’s model and strategic
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planning and balanced scorecard. And in the next step the study was about deliberation these concepts and
comparing them. Balanced scorecard and David’s model was explored and the weaknesses of David’s
model was discovered and it was checked if balanced scorecard implementation eliminate these
weaknesses. These studies and implementation of integrating David’s model and balanced scorecard gas
done as a case study in Mahan Airlines. According to purpose of the study and method of data collection,
this is an applied and descriptive-survey research. The method of data collection basis is on descriptive
research and on the other hand because data were gathered of the feedbacks from pundits (by
questionnaire) the study has a survey aspect. Mahan Airline managers in Tehran and in center office
placed in Tehran are the statistic sample and population. In this study raw data were given to SPSS
software version 18, and be analyzed. First, by descriptive statistics we described and summarized
demographic characteristics of the sample population including age, gender, rate of education and work
experience and then we used inferential statistic. T-test is used to investigate the effects of gender variable
and ANOVA is used to investigate the effect of rate of education, work experience and the age of repliers.
Field and library researches were used to gathering data from questionnaires. Content validity was
designed by using the comments of advisor and consultant professors and superior managers were
questioned by balanced scorecard with 4 perspectives. The stability of this research was calculated by
Cronbach’s Alpha that usually more than 0.7 is desirable.
The number of questions Cronbach’s Alpha
Superior managers 68 Before BSC=0.797
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68 After BSC=0.972
Structure Of data analysis
Structure of data analysis according to the questionnaires is: given questionnaire to superior managers
contains 68 questions that evaluate organization performance before and after balanced scorecard. In this
questionnaire 4 perspectives of BSC are questioned as follows: 14 questions of financial perspective, 16
questions of customer perspective, 23 questions internal business perspective and 15 questions of growth
and learning perspective. Through analyzing the data of this questionnaire, this will be defined by BSC if
weaknesses of strategic planning are decreased and effective improvement is happen about this planning.
To this end, after descriptive analysis, inferential analysis has been used to consider effectiveness of the
model before and after implementation and analysis of the issue has been mentioned descriptively and
inferentially. Finally in further tests in order to analyze the effect of each demographic variable on
considered status, T-Test, Mean square Test, analyze of variance and variable ratio have been used.
Conclusions
Effectiveness analysis of BSC model: before and after implementation, superior managers were
questioned and Men square Test has been used in both populations before and after implementation of
BSC.
H0: implementation of BSC in the organization is not effective
H1: implementation of BSC in the organization is effective and sig=0
As you can see, sig’s value is less than 0.5, thus H0 hypothesis based on the absence of effectiveness of
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BSC model in the organization is rejected and we conclude that implementation of this model in the
organization is effective. We compare variable ratio before and after BSC implementation in the
organization in order to analyze the percentage of improvement and decrease of weaknesses of David’s
model. Implementation of BSC showed improvement such that %98.3 of repliers believe an improvement
of %60=1,2 multiplication in financial perspective, %93.3 of repliers believe an improvement of %65=1,3
multiplication in customer perspective, %100 of repliers believe an improvement of %65=1,3
multiplication in internal businesses perspective, %94.9 of repliers believe an improvement of %65=1,3
multiplication in growth and learning perspective. The improvement range is 1 to 1.5 multiplications.
Improvement of 1.2 multiplications in financial perspective, Improvement of 1.3 multiplications in
customer perspective, Improvement of 1.3 multiplications in internal businesses perspective and
Improvement of 1.3 multiplications in growth and learning perspective is gained. It can be said %60 of
improvement and decrease of weaknesses in customer perspective and %65 of improvement in the other
perspectives are gained.
Do the weaknesses of David’s model decrease or eliminate by using BSC? According to the results, it can
be noted that implementation of BSC decrease the weaknesses of David’s model significantly.
Inferential demographic data analysis according to the results of independent T-Test
The first sig (significant number) is related to variance test, where sig is greater than 0.05, means that
two different genders have similar opinions and H 0 is accepted and where sig is less than 0.05, means that
H0 is rejected and H 1 is accepted and two different genders have different opinions. The second sig is for
paired comparisons in two different genders, and the result shows that the average in two populations is
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not equal, means where sig is greater than 0.05, H 0 is accepted and where sig is less than 0.05, H 0 is
rejected and H 1 is accepted. In order to establish equality in average in variable of age, educational rate
and work experience, variance analysis was used and results in: where sig is greater than 0.05, means that
different levels have similar opinions and H 0 is accepted and where sig is less than 0.05, H 0 is rejected
and H 1 is accepted and means at least two different levels have different opinions.
References Aarabi, M. and Agha Zadeh, H. andNezami Vand Chegini, H. (2006). Manuals strategic planning. Printing. Publication Office of Cultural Studies.Bakhtiari,P.(1982).Organization based strategy.Tehran.Publication: Industrial Management. Ali Ahmadi, Ali Fateh Ali, Mehdi Taj Din, I. (2002). Comprehensive approach to strategic management. Tehran. Publishing: knowledge production. Alvani,M and Seyed Naqvi, M.A. (2003). Article: balanced scorecard model, a model for performance measurement in the public sector. Quarterly Journal of Management Studies, No. 37 and 38. Pp. 2-17. Bostaniyan, J. (2005). Article: Using the Balanced Scorecard reports for strategic management plan. the auditor, No. 31. Pp. 84-90. Creelman,j.Markhijani,N.(2008).How Leading Organizations Success Fully Implement Corporate Sterategy with the Balanced Scorecard,the OT1 Thought Leader Ship Series 1.p 1-16. David,F.R.(1999).Concept of Strategic Management.New Yourk Macmillan. David , F.R.(1997). Strategic Management. Dixon, N.M & Et.al. (1990).Commen Knowledge How Compains Therive by Sharing what They Know.Harward Business School. Fry.L, Fred & Stoner.R, Charles.(1995). Strategic Planning For The New And Small Business. Upstart Publishing Company, INC. pp12.. Ghalayini ,A.M & Noble ,J.S .(1996).The changing basic of performance measurement ,International Journal of Quality.13(2).p 55-65. Hepworth ,paul.(1998).Weighing it up-A literature Review for the Balanced Scorecard.Journal of Management Development .Vol 17.No 8.p 559-563 Kaplan R.S. & Norton D.P.(1992).Balanced Score cared. Kaplan R.S. & Norton D.P.(1996). Using the Balanced Score cared as a Strategic Management System.Journal:Harvard Business Review.
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Kaplan Robert s &Norton ,Daivid p.(1996).Translating Sterategy into Action :The Balanced Scorecard.Harvad Business School Press.USA. Kaplan R.S. & Norton D.P.(2001).Balanced Score card. Kaplan ,R & Norton ,D.(2008).Execution Premium.Harward Business School Press. Management Encyclopedia. (2001). Mortinsons& Davison,Tse.(1997).The Balanced Score card :a foundation for the strategic management of information system.dicision support systems.No 25.p 71-88 Namazi, M. and Ramezani, Amir. (2002). Article: Balanced Scorecard in management accounting. Journal of Social Sciences & Humanities, Shiraz University, No. 2. Pp. 2-20. Niven R. Paul. (2008 ). "Balanced Scorecard - a step by step guide to design and implementation." Translation Bakhtiari P. et al. Publication of Industrial Management, First Edition. Rahimi, GH. (2007), performance Assessment; continuous improvement of organization. Tadbir Journal, No. 173. Pp. 36. Rigby k.(2001).Management Tools, Global Results : Annual Survey org senior Executives,Brains and company 2001Management Tools and Techniques survey profiles the usage and effectiveness of management tools among 451 companies in 22 countries around the world. Rokni Nejad, Mehrdad. (2008). Article: Organization Performance Assessment. Articles on the executive's performance appraisal system. Productivity Management Studies University, 2008. Thompson and Strickland. (1982). Strategic management / mining of the case. Wongrassamee ,P.D & Gradiner,J.E.L.simmons.(2003).Performance measurement tools:the BSC and the EFQM Excellence Model.Measueing Business Excellence.7.p 14-29.s.
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A Comparative Study of NAV (Net Asset Value) Returns of
Open-endedandClose-ended Mutual Funds in Pakistan
Nawaz Ahmad (Corresponding Author)
Head of Research & Publications, Department of Business Administration & Commerce, Indus
University
PO Box 17642, ST-2D, Block 17, Adjacent National Stadium, and Karachi, Pakistan
Tel: 0092-300-9292422 E-mail: [email protected]
ImamuddinKhoso
Directors, IBA, University of Sindh
Indus Highway, Karachi-Hyderabad Motorway, Sindh Campus Road, 76080, Jamshoro
Tel: 0092-22-9213181-90 E-mail: [email protected]
RizwanRaheem Ahmed
Assistant Professor, Department of Business Administration & Commerce, Indus University
PO Box 17642, ST-2D, Block 17, Adjacent National Stadium, and Karachi, Pakistan
E-mail: [email protected]
Abstract
Research study is a comparative study of the returns of the two mutual funds which are close ended and open ended
mutual fund, quarterly data of Net Asset Values NAV of both the funds from 2008-2012 (inclusive) was taken and
the return on those NAVs was calculated through natural log (LN) function. First the normality test of
Kolmogorov-Smirnov and Shapiro-Wilk indicates that the data is not normally distributed as P<0.05 in both the test;
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also the descriptive test verified the results of normality test as the Kurtosis and Skewness values were greater than
the normal values (Kurtosis 28.11 > 3) and (Skewness 2.81 > 0), both the tests indicates that data is not normally
distributed and which we cannot apply parametric test of mean equality which is T-TEST but due to abnormal
nature of the data non-parametric test of mean equality which is MANN-WHITNEY U test was followed. Results
of the test states that NAV return of Open end mutual fund (Median = 0.0078, U = 98.78) did not differ
significantly from NAV return of Close end funds (Median = 0.0048, U = 98.21), z = −0.071. We fail to reject the
null hypothesis that there is no difference between the NAV returns of Open end and Close end fund as p >.05
Key Words: Close end mutual fund, Net Asset Value, Open ended mutual fund.
1. INTRODUCTION
1.11.11.1Background1.1 Background of the study
Mutual fund is a type of financial investment which got popularity at developed financial markets but in recent
years it is getting higher attention by the investors in the developing economies such as Pakistan. A mutual fund can
be defined as “combined pool of money by different investors for the investment purpose, who invests in different
asset classes to seek higher return at minimum risk level”. In simple words the mutual fund is basically an
investment in which different investors pool their money in and get the return on those funds after certain time
period and also at the time of the maturity of that investment. These funds are managed by financial expert and the
portfolio managers who are entitled to take investment decisions and against their services they charge certain
amount of money as management fee. Mutual fund is the desired investment by the investors because it includes
variety of financial asset in it which reduces the investment risk and helps investors to reap optimal returns through
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diversification, other benefits of the mutual funds are that they provide liquidity, affordability, transparency and
economies of scale to the investors.
Mutual Fund has distinct industry in financial sectors which is known as asset management industry; during the last
few decades this industry has it has experienced exponential growth mainly due to the higher investors’ trust on
investing in mutual which provides striking returns with lower level of risk. The investment of the fund managers
are relentlessly seeking for different investment opportunities in financial markets which is their main objective of
managing portfolio, also they like to minimize risk level while maintaining higher return, which is greatly attained
by investing in mutual funds.
Mutual Fund investment was first originated from North America in 1924, but it became most popular in early
1980s across the globe. According toWilford(2008) currently the total worth of mutual funds investment is roughly
around $20trillion and approximately half of this amount is contributed by the United States mutual funds industry
alone.
1.1.1 Close-ended and open-ended Funds
There are two types of mutual funds with respect to the investment pattern these are; Open-ended and close-ended
Mutual Fund. Despite the facts that these funds come under the heading of mutual fund but both the funds are
completely different from each other in terms of trading.
Close-ended mutual funds are initially offered to the public through primary offering and subsequently funds are
traded in the secondary market and ownership transfers among different investors. The former can only increases a
set amount of investment only through an initial public offer by issuing certain number of shares considering the
current demand for the investment, units of share of funds are later purchased very first time by investors in the
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closed-end, fund is traded thereafter same as any stock after IPO. Units of close ended mutual fund are called
“shares” and the value of the fund is known as “net asset value- NAV”, i ndividuals as well as institutions can buy
or sell shares of close-end funds at a certain price level by any time from secondary market. Like other financial
assets and the market securities the value of close-ended Fund depends on the demand and supply forces in market.
Daily NAV value of close-end fund does change according to free market dynamics i.e. demand and supply of
particular fund.
On the other hand open-ended funds are totally different from the close end funds and they are only issued by asset
management companies- AUMCs, they sell units of open-end funds to different investors, the units of open end
fund does not trade on secondary market and the funds’ NAV value adjust according to the share prices of stocks &
financial assets selected in portfolio. Open end funds are more liquid than that of close end funds this is why close
end funds are traded on discounted value unlike open end fund which trades exactly on NAV value. Open end
fund requires subscription and do allow redemption of units on recurrent basis while the investors have legitimate
option to change their investment proportion whenever they want to do so before the maturity of any particular
fund. Open end fund as name suggests does not have any fixed or closed pool for investment, the fund manager in
an open end fund can increase the units of fund whenever he or she requires and it they also allow investors to
leave or join the fund whenever the investor wants.
The trading price of the open end fund is its NAV value and investors can purchase the units of funds at the
particular NAV value of that day. Net asset Value NAV is considered as a performance indicator of any fund that is
why trading of every fund is done according to NAV value of the fund.
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